level of sustainable income?

Thrugelmir

Malthusian wrote: »

The tricky thing about safe withdrawal rates is that it stops being a safe withdrawal rate during a crash - albeit hopefully temporarily - as the fall in the fund value increases the withdrawal %.

The SWR isn't a consistant rate. When the portfolio produces an annual negative return. The amount withdrawn is adjusted accordingly, i.e. frozen to compensate.

Many people overlook this. Assuming that the portfolio will produce an index linked income year on year.

Linton

Safe withdrawal rate claims are based on the initial value of the pension pot increasing with inflation being paid regardless of the state of the market. They are only safe in the sense that had you started your withdrawal at any point in say the past 100 years (or the first 70 years of that 100 years) you would not have run out of money for say 30 years or whatever life expectancy was used in the calculation. No one can say anything very useful as to what will happen in the next 30 years, but historical data is the only data we have.

Malthusian

Thrugelmir wrote: »

The SWR isn't a consistant rate. When the portfolio produces an annual negative return. The amount withdrawn is adjusted accordingly, i.e. frozen to compensate.

Not by most definitions of SWR.

The classic "4% rule" is supposed to mean that you draw 4% of the initial value and increase this by inflation every year, ignoring the market completely.

More complex SWRs such as Guyton-Klinger attempt to increase the headline rate by introducing rules where you freeze or even decrease income in poor market years.

If you simply draw 4% of the current value each year then Key Stage 2 maths says it will never run out no matter how bad markets are. However your income could drop by 30-40% during a crash, which is very off-putting to msot people. You are also heavily prioritising your heirs over your own lifestyle.

If you can reduce your withdrawals by 30-40% without any loss of lifestyle, then you can happily ignore the SWR debate as you are sorted.

Thrugelmir

Malthusian wrote: »

If you simply draw 4% of the current value each year then Key Stage 2 maths says it will never run out no matter how bad markets are.

Care to share a link? Be interested to see what this portfolio is constructed of. As markets is a somewhat broad term. Likewise what fixed interest stocks are included.

Some of us have been involved with stocks and shares for a very long time. Endowments in part failed to deliver due to the (now permanent) collapse of the Nikkei. Major life assuers first buying into the Japanese market in the late 70's. Never say ever. That's being complacent. Something no investor should ever be.

Sea_Shell

Of course...if you started with £500k and drew 4%, that'd be £20k.

Then if the markets dropped and next year you only had £250k, then 4% of that would be £10k

If the market dropped to £100k, 4% would be £4k. etc etc.

So yes, you'd never run out of money (but would have nothing to live on!!!)

So the "rule" must be based on the starting figure. eg pull £20k per year regardless.

[Deleted User]

Has anybody modelled a SWR for a UK couple whose have state pensions kicking in at 67 but take early retirement at 55. I have tried firesim but cant understand it fully (perhaps I need to do more reading of the manuals). Surely there will be 2 - one up to state pension and one thereafter

jamesd

Deleted_User wrote: »

Has anybody modelled a SWR for a UK couple whose have state pensions kicking in at 67 but take early retirement at 55. I have tried firesim but cant understand it fully (perhaps I need to do more reading of the manuals). Surely there will be 2 - one up to state pension and one thereafter

See my worked example in Early retirement @ 55 what to do with £ 380000 then move on to some other worked examples which explains how to approximate UK rather than US results.

[Deleted User]

jamesd wrote: »

See my worked example in Early retirement @ 55 what to do with £ 380000 then move on to some other worked examples which explains how to approximate UK rather than US results.

Thank you - those threads should be in the sticky. Including a golden nugget on why spending is blank in some cfiresims scenarios (bugging me for weeks)

[Deleted User]

Thrugelmir wrote: »

Then you'll be performing under the current level of inflation. Resulting in the equity part of the portfolio having to do far more heavy lifting to compensate.

Getting high returns isn’t the purpose of bonds in my portfolio. I have them purely to deal with certain types of risk in the short term. In any case, return of 0.1% below inflation from short term bonds vs 0.1% above inflation for long term ones is inconsequential to the expected return from the overall portfolio. And stocks are in any case better at handling long term risks

Linton

Deleted_User wrote: »

Getting high returns isn’t the purpose of bonds in my portfolio. I have them purely to deal with certain types of risk in the short term. In any case, return of 0.1% below inflation from short term bonds vs 0.1% above inflation for long term ones is inconsequential to the expected return from the overall portfolio. And stocks are in any case better at handling long term risks

The problem I see with that all or nothing approach is that to have any significant affect on short term risk you need a moderately high % of bonds which means significantly less equity than would otherwise be possible. In the UK, short dated government bonds yield perhaps 1.2% less than inflation. Long dated bonds about 0.2% less than inflation. So rather different to the presumably US figures you quoted. The low yield corresponds to the high price of the bonds, which must revert to par at some stage. So UK Government bonds held in a bond fund present a risk to capital.


In the UK either holding safe Government bonds or cash are simply alternative ways of being out of the market. In the short term cash is probably safer.