Another newcomer

cfw1994

lisyloo wrote: »

Sorry that’s not clear to me.

If you had pot growth of 4% (after charges) and a SWR of 4%, then the pot would stay static forever (hoorah) but the income would be level which in real terms would reduce over a long retirement.

Are you saying you’d expect growth after charges to exceed SWR bearing in mind some is in more cautious investments in case of a downturn?

Or am I missing something?

Or is it a case of adjusting as you go. I get that expecting an SWR to work without adjustment over 30 years is naive, but I’d like to understand how the inflation is catered for or not as the case may be.

You are right with that example: if pot growth = 4% & SWR = 4%, pot = same. But effectively worth a bit less due to inflation.
However, remember the aim isn't to die the richest in the graveyard, leaving the pot you started with, but to wind that pot down to X (where X is the pot you want to pass on. Perhaps £0 !)

So the ideal goal (in my simple pre-retirement head!) is for pot growth to *exceed* <withdrawal rate + inflation> for as many years as possible. Naturally there may (will!?) be years where that fails. Maybe you tweak. Maybe you accept it.

So if inflation in your example is 2.5%, you want growth to hit 6.5% to enable the pot to remain static.

When you say "Are you saying you’d expect growth after charges to exceed SWR bearing in mind some is in more cautious investments in case of a downturn?" - that would be great, but each individual makes their own risk-adjusted investments (or have their IFA/FA assess them to help define that).

This is (for me!) why I would not want to be super-pessimistic/cautious on retirement - I will want that pot to grow at 7-10% p.a. on average to continue to support 30+ years of hoped for retirement! I may be deluding myself, but the funds I have chosen for the past 15+ years within my Aviva plan have *averaged* over 10%, so I have hope.
& yes, I know it has been a bright old bear market through that time....so I will likely stumble a bit along the way.

In summary: adjustments might be needed, I am sure!

Not sure this is any clearer for you.....but I do feel this is not a science, but a loose art!

eta - & yes, I am not, nor ever have been, a financial advisor, so make of my ramblings what you will!

NoMore

AIUI taking the simple 4% swr rule, you adjust the actual starting amount this produces by inflation each year for your withdrawal

(I'm sure jamesd will post about other variants like guyton klinger soon, which has extra rules )

EDIT: Also this neither an endorsement or criticism of any swr plan.

lisyloo

Thanks.
So pot grows in line with inflation, so the 4% of the pot is inflation adjusted.

Linton

lisyloo wrote: »

Thanks.
So pot grows in line with inflation, so the 4% of the pot is inflation adjusted.

No - SWRs are based only on the initial pot. Subsequently the drawdown increases with inflation whereas the pot value goes up and down in its own sweet way. The SWR is the highest rate at which historically you would never have run out of money (possibly within some % chance close to 1).

Audaxer

lisyloo wrote: »

Thanks.
So pot grows in line with inflation, so the 4% of the pot is inflation adjusted.

The most important factor as to how long your money will last is the sequence of returns during retirement. Two retirees starting retirement in different years, but with the same size pots and the same average returns over a 30 year retirement and drawing out the same amounts each year, could have very different outcomes. If Retiree A has a bad sequence of returns in the first decade of retirement, his/her money might not last 30 years, whereas if Retiree B has a good first decade of returns, he/she may end up with a fair amount of their capital left after 30 years. Therefore I think you need either a flexible withdrawal rate and/or a cash buffer to mitigate against a poor sequence of returns.