SWR start point and market value on retirement

seacaitch

michaels wrote: »

So I imagine stock markets as following a slight upward line over time with lots of peaks and trough noise either side of the trend line.

If this is reasonable as a model then does that mean on retirement rather than taking say 4% of your ppt value on retirement you should take 4% of the trend fit line at that point.

Linking your withdrawals to economic fundamentals such as corporate earnings, which are much less volatile than equity valuations, is a valid and sensible option for mitigating sequence risk in the first half of a retirement if that period coincides with high valuations.

jamesd mentions (with links) to using Shiller CAPE; here's some further details on this approach, which is worth a read:

Flexibility and the Mechanics of CAPE-Based Rules

https://earlyretirementnow.com/2017/08/30/the-ultimate-guide-to-safe-withdrawal-rates-part-18-flexibility-cape-based-rules/

Compared to some of the alternatives, this method is likely to deliver less volatility in annual drawdowns, which I see as a good objective, but achieves this by ensuring that drawdowns in periods of high valuation are appropriately conservative (low).

The approach I take is loosely informed by this method.

MK62

I just re-assess everything on an annual basis and take it from there.......I keep a cash buffer so whatever happens, the proverbial won't hit the fan immediately, and I have a reasonable idea of where my "pot" needs to be to support various levels of withdrawal at different ages.


Living beyond 90 could be a bit inconvenient though........

jamesd

Thrugelmir wrote: »

May 2008 was a different era. Some rather major financial events happened shortly afterwards and have continued since. ... Then there's the fundamentals such as p/e ratios etc to be considered as well.

Thrugelmir wrote: »

The data is entirely US centric that's my point. You appear to be trying to find evidence to substantiate a view. Rather than maintaining an open mind.

The research covers around a hundred years and the correlation has been found to apply to every major equity market.

Cyclically adjusted P/E are the driver of the correlation, not something extra.

jamesd

michaels wrote: »

IBy that metric markets are currently very high. The models also show 60:40 equity bonds as producing the highest swrs. As you point out real bond returns are now much lower than historically (perhaps for the reasons in my next paragraph) so this alone would put a drag on any future swr.

Not all equity markets are at high cyclically adjusted P/E but the US tends to be quite significant and is.

Bengen and others have observed that for periods longer than 30 years more equities is better, the converse for shorter times.

Real bond returns have in the past been lower than now. For the US it was observed that at times of low rates Treasury Bills (money market equivalent) beat bonds.

DT2001

MK62 wrote: »

I just re-assess everything on an annual basis and take it from there.......I keep a cash buffer so whatever happens, the proverbial won't hit the fan immediately, and I have a reasonable idea of where my "pot" needs to be to support various levels of withdrawal at different ages.


Living beyond 90 could be a bit inconvenient though........

I agree with your plan, in theory, as we are yet to retire. Seashell and Linton have both advocated a flexible approach. I’ve dealt with variable income for the last 20+ years of self employment so I have the mindset that maybe some employees do not. 2 questions, do you top up your cash fund in good years so you always have a predetermined figure and are you actually missing out on better than inflation returns by holding larger amounts of cash (presuming you do) that would give a better long term return?

Thrugelmir

jamesd wrote: »

The research covers around a hundred years and the correlation has been found to apply to every major equity market.

Including China?

Or India?

The world is a very different place to that of just 30 years ago.

Linton

jamesd wrote: »

Not all equity markets are at high cyclically adjusted P/E but the US tends to be quite significant and is.

Bengen and others have observed that for periods longer than 30 years more equities is better, the converse for shorter times.

Real bond returns have in the past been lower than now. For the US it was observed that at times of low rates Treasury Bills (money market equivalent) beat bonds.

With globalisation over the past 20 years I find it difficult to see how different geographical markets can have very different cyclically adjusted P/Es. Since shares can easily be traded across the world and it would seem that in most of the worlds stock exchanges more than half of all holdings are owned by foreign investors. No rational foreign investor is going to pay more for a global oil company primarily traded on say the French stock exchange than they would pay for an equivalent company traded in New York.

One can argue that neither of the recent major crashes which affected all exchanges across the world arose from general market conditions of the type that would be driven by general cyclic P/E considerations. The .com crash was a large but simple bubble in a small part of the market arising from technology change and the 2008 crash was the result of ill-judged lending that compromised the global banking system. In both cases the markets recovered to previous valuations pretty quickly.

As regards bonds, ISTM that the issue is not the real rate of return but rather that capital values are close to the point at which the cash returns become negative. Although to a rational investor this may not be as significant as the real returns, it is very significant psychologically. Another important factor is that most small investors use general bond funds rather than directly holding bonds with maturity dates that match their objectives. This makes short term capital values of greater importance than overall long term interest returns.

For these reasons I would argue that the situation for small investors is different now to that in past and that the 100 years of data is only of limited relevance.

MK62

DT2001 wrote: »

I agree with your plan, in theory, as we are yet to retire. Seashell and Linton have both advocated a flexible approach. I’ve dealt with variable income for the last 20+ years of self employment so I have the mindset that maybe some employees do not. 2 questions, do you top up your cash fund in good years so you always have a predetermined figure and are you actually missing out on better than inflation returns by holding larger amounts of cash (presuming you do) that would give a better long term return?

Top up?.......well the "buffer" isn't really a seperate "pot" as such, and I haven't yet gone through a major downturn while retired, so at present it's going to plan and hasn't needed any topping up as such, beyond the annual withdrawals from pensions/S&S ISAs. However when that downturn comes and (hopefully) goes I will reassess things then and decide at the time.
One issue is that topping up a cash buffer from a pension means paying 20% tax upfront on the extra withdrawal......a bit self-defeating imho, so if it happens it would be from S&S ISAs.
There is no real predetermined figure tbh, beyond the fact that at it's peak it might be around 2-2.5 years worth of current income and will vary through the (tax) year to a minimum 1-1.5 years worth (if things went really badly in the markets though that "current income" would then be reduced, so it's all a bit fluid in that respect)

As for missing out on returns by holding more cash....possibly (though it can work the other way too if markets go south) - it also depends on the level of cash we are talking about, as a percentage of the whole "pot".

However, I accepted a while ago that, for me, it's not just about trying to maximise returns - there's also a defensive element involved, and that doesn't just stop at fund selection.
Plus, tbh, I like the idea that whatever happens, I won't be forced into anything immediately (which to me, in investment terms, means within a year or two..:))...I suppose it's my "comfort blanket"...;)

There are quite a few ways to tackle income drawdown from investments, so you have to weigh them up and decide for yourself which fits best for your particular circumstances - there is no one-size-fits-all (though most will dance around the same tune of potentially variable income throughout retirement)

Sea_Shell

Looking at our cash figures, they actually form about 18% of our overall pot, which is approx. 8 years of spending. Too much?? probably. Do we sleep soundly? Yes. That is all earning at least 1.5% interest.

Once DH has access to his DC pensions (in 27 months time), we'll reassess again, and may just move forwards with, say, a 5 year buffer. But we'll continue to monitor things regularly.

michaels

Sea_Shell wrote: »

Looking at our cash figures, they actually form about 18% of our overall pot, which is approx. 8 years of spending. Too much?? probably. Do we sleep soundly? Yes. That is all earning at least 1.5% interest.

Once DH has access to his DC pensions (in 27 months time), we'll reassess again, and may just move forwards with, say, a 5 year buffer. But we'll continue to monitor things regularly.

So losing about 0.5% pa in real terms on the whole cash buffer rather than hopefully growing at 2% in real terms if it was the invested. Not saying it is the wrong thing to do but pretty costly over 30 years.....