SWRs when front loading drawdown

Audaxer

BritishInvestor said:

Audaxer said:

BritishInvestor said:

garmeg said:

BritishInvestor said:

Linton said:

I think taking SWRs too seriously and getting into strategies like Guyton-Kilingor are pointless except possibly as a quick rule-of-thumb type sanity check.  I cant see anyone in retirement actually using them since after the first year real returns will be different to plan.

I think you may have misunderstood the purpose of using historical data and the Guyton rules etc. Actual returns going forward are used to determine future withdrawal rates.
https://finalytiq.co.uk/guyton-klinger-sustainable-withdrawal-rules/

• The withdrawal rule: Increase withdrawal in line with inflation in the previous years, unless the previous year’s portfolio total return was negative. This is by far the most effective of the rules. By making sure that withdrawals are frozen in the years following a negative portfolio return, the danger of pound-cost ravaging is drastically minimised. Following the rule means clients do not ‘make up’ for missed withdrawal increases.

• The portfolio management rule: Extract the gains from an asset class that has performed best in the previous year to provide the income, and move excess portfolio gains (beyond what is needed for the withdrawal) into a cash account to fund future withdrawals.

• The capital preservation rule: If the current withdrawal rate rises above 20% of the initial rate, then current spending is reduced by 10%.

• The prosperity rule: Spending in the current year is raised by 10% if the current withdrawal rate has fallen by more than 20% below the initial withdrawal rate. Doing this means the client does not miss out on higher sustainable spending when markets are doing well.

Not sure I understand the last two points.

Capital Preservation
Start at £10,000 pa and increase by inflation. After a few years inflation you are withdrawing £12,000. As this is 20% above the initial rate you reduce this by 10% to £10,800 next year??? Doesn't make sense.

Prosperity Rule
Withdrawals only go up or are frozen so how can it fall 20%? Probably ties in with my (mis)understanding of the capital preservation rule.

If you take an example of a starting pot of £100k and £5k initial withdrawals that gives an initial withdrawal rate of 5%
Your upper band is 6% (20% higher) and lower band is 4% (20% lower)
So if your portfolio has remained broadly flat at £100k over the next few years but inflation means your withdrawals at the start of a new year "should" be £6,100 this would breach the capital preservation rule and withdrawals would be reduced by 10%
Conversely the prosperity rule may trigger if your portfolio has performed strongly, so is now at £200k and your withdrawals are scheduled to be £7,000, the withdrawal rate of 3.5% means it is lower than the lower band so would be raised 10%

I think I would only raise my actual spending if I needed to or wanted to. However if the portfolio had doubled in value to £200k, why not still withdraw the full 5% or even 6% and put the cash you don't need for spending into a cash buffer, so that you don't need to cut you spending in negative growth years?

We've discussed cash buffers on another thread

I know we have, but under these Guyton-Klinger rules using your example above, I just wondered about the reasoning in restricting your withdrawal rate to raising it only to 4%? I just thought at times of significant growth it would make more sense to have a higher withdrawal rate, i.e. selling a bit more after significant portfolio gains and hold excess as cash, so that there is less need to sell in subsequent years when the portfolio has made a loss. That way it seems to me you wouldn't need to reduce expenditure in loss years. Just trying to understand why you wouldn't do that?

BritishInvestor

Audaxer said:

BritishInvestor said:

Audaxer said:

BritishInvestor said:

garmeg said:

BritishInvestor said:

Linton said:

I think taking SWRs too seriously and getting into strategies like Guyton-Kilingor are pointless except possibly as a quick rule-of-thumb type sanity check.  I cant see anyone in retirement actually using them since after the first year real returns will be different to plan.

I think you may have misunderstood the purpose of using historical data and the Guyton rules etc. Actual returns going forward are used to determine future withdrawal rates.
https://finalytiq.co.uk/guyton-klinger-sustainable-withdrawal-rules/

• The withdrawal rule: Increase withdrawal in line with inflation in the previous years, unless the previous year’s portfolio total return was negative. This is by far the most effective of the rules. By making sure that withdrawals are frozen in the years following a negative portfolio return, the danger of pound-cost ravaging is drastically minimised. Following the rule means clients do not ‘make up’ for missed withdrawal increases.

• The portfolio management rule: Extract the gains from an asset class that has performed best in the previous year to provide the income, and move excess portfolio gains (beyond what is needed for the withdrawal) into a cash account to fund future withdrawals.

• The capital preservation rule: If the current withdrawal rate rises above 20% of the initial rate, then current spending is reduced by 10%.

• The prosperity rule: Spending in the current year is raised by 10% if the current withdrawal rate has fallen by more than 20% below the initial withdrawal rate. Doing this means the client does not miss out on higher sustainable spending when markets are doing well.

Not sure I understand the last two points.

Capital Preservation
Start at £10,000 pa and increase by inflation. After a few years inflation you are withdrawing £12,000. As this is 20% above the initial rate you reduce this by 10% to £10,800 next year??? Doesn't make sense.

Prosperity Rule
Withdrawals only go up or are frozen so how can it fall 20%? Probably ties in with my (mis)understanding of the capital preservation rule.

If you take an example of a starting pot of £100k and £5k initial withdrawals that gives an initial withdrawal rate of 5%
Your upper band is 6% (20% higher) and lower band is 4% (20% lower)
So if your portfolio has remained broadly flat at £100k over the next few years but inflation means your withdrawals at the start of a new year "should" be £6,100 this would breach the capital preservation rule and withdrawals would be reduced by 10%
Conversely the prosperity rule may trigger if your portfolio has performed strongly, so is now at £200k and your withdrawals are scheduled to be £7,000, the withdrawal rate of 3.5% means it is lower than the lower band so would be raised 10%

I think I would only raise my actual spending if I needed to or wanted to. However if the portfolio had doubled in value to £200k, why not still withdraw the full 5% or even 6% and put the cash you don't need for spending into a cash buffer, so that you don't need to cut you spending in negative growth years?

We've discussed cash buffers on another thread

I know we have, but under these Guyton-Klinger rules using your example above, I just wondered about the reasoning in restricting your withdrawal rate to raising it only to 4%? I just thought at times of significant growth it would make more sense to have a higher withdrawal rate, i.e. selling a bit more after significant portfolio gains and hold excess as cash, so that there is less need to sell in subsequent years when the portfolio has made a loss. That way it seems to me you wouldn't need to reduce expenditure in loss years. Just trying to understand why you wouldn't do that?

Maybe what you are suggesting is a form of ratcheting rule, where withdrawals are increased if we have a good series of returns in retirement.
https://www.kitces.com/blog/the-ratcheting-safe-withdrawal-rate-a-more-dominant-version-of-the-4-rule/
The downside to this rule that it may allow you to spend more in later retirement whereas retirees tend to want to spend more in early retirement.
The downside to taking out too much from the portfolio (even if you hold in cash and don't spend it) is that we don't know what is around the corner. We might need to hold a certain amount in equities to give us the long-long term growth required.

NedS

kangoora said:

I think you're over-complicating things. SWR, whether using Guyton-Klinger or not, is used as a means of withdrawing a certain amount of cash per year whilst (hopefully) maintaining the capital. You are going to be drawing down 'x' amount of money to maintain a lifestyle until your pensions kick in, so SWR is immaterial in your drawdown phase UNLESS you are close to the wire on DC pot lasting until you get your pensions. If this is the case I'd question the wisdom of retiring at your planned point and maybe think 'just one more year'. Once you have reached full pensions then SWR can be used to maintain what remains of your capital/extra spending money after sustaining you for 10 years.

I'm doing what you are planning, am at the age you plan to start and am broadly similar in that my DB and SP pensions will cover general spending at age 67. I just keep 3 years expenses in cash/ISA's/some 2 year bonds. The rest is invested in VLS60 and equvalent for (hopefully) some capital growth and to draw down a top-up to existing DBs before age 67. I've also got 2 reasonable TFLS coming in before 67, each of which is around 1/2 my annual spends so some years I'll draw even less from the DC pot.

I'd recommend cfiresim or Firecalc to run your numbers (just remember to up the charges to reflect what your pension charges are as they assume very low rates), they are american based but should let you know if you have a good/reasonable or barking mad chance of achieving your aims.

@kangoora Thank you - yes it sounds like we are in a very similar position. We shouldn't be close to the wire on the DC pot by the time I retire. Back of an envelope maths show we already have around £100K surplus over our assumed £25K pa minimum target income, and we hope to double that before retiring. I'm also making extra conts to the current employers DB scheme to top up our guaranteed income and further reduce risk.

Everyone's comments have been really helpful, and I will look at running some simulations to get a clearer idea about where we are with the numbers.