Historical inflation - how different inflation models can affect safe withdrawal rates

tacpot12

It is also important to remomber, when considering 'safe' withdrawal rates, that the UK is different to the USA.

The state pension makes a big difference, as will any historic DB pensions that the pensioner has. My own Safemax was 6.12% and I now regard this have having risen to 6.21% as a result of the reduction in CAPE for the UK stockmarket. (About 50% of my portfolio is invested in UK Equities). I also have a 45 year retirement horizon (rather than the 30 year used in Safemax), as I retired at 55 and have planned for a life expectancy of 100 years. 

OldScientist

Grumpy_chap said:

OldScientist said:

So how much effect does this have on safe withdrawal rates? The Safemax (i.e. the highest inflation adjusted withdrawal that does not result in portfolio exhaustion within 30 years), 

Top marks for taking a detailed and data-based approach, however I can't help think you don't need any of that historic data to work out the safe withdrawal rate for a new retiree in 2022.

You need a crystal ball.

Cheers - I completely agree - we can only hope that the SWR for 2022 is no worse than the 1937 period that included a world war, a decade or more of post-war austerity (including coming within a few weeks/months of introducing starvation rationing), and some awful real returns on bonds (around -2% annualised over 30 years). My own view is that historic SWR at least gives a guide to indicating what level of withdrawals are likely to be sensible and what are not, but more flexible approaches are going to be more robust. 

ps I've put a crystal ball on my Christmas list - just a few more days until I find out if anyone bought me one...

BritishInvestor

tacpot12 said:

It is also important to remomber, when considering 'safe' withdrawal rates, that the UK is different to the USA.

The state pension makes a big difference, as will any historic DB pensions that the pensioner has. My own Safemax was 6.12% and I now regard this have having risen to 6.21% as a result of the reduction in CAPE for the UK stockmarket. (About 50% of my portfolio is invested in UK Equities). I also have a 45 year retirement horizon (rather than the 30 year used in Safemax), as I retired at 55 and have planned for a life expectancy of 100 years. 

The SWR relates to a given set of assets, so I'm not sure how the state and/or DB pensions are relevant?

OldScientist

tacpot12 said:

It is also important to remomber, when considering 'safe' withdrawal rates, that the UK is different to the USA.

The state pension makes a big difference, as will any historic DB pensions that the pensioner has. My own Safemax was 6.12% and I now regard this have having risen to 6.21% as a result of the reduction in CAPE for the UK stockmarket. (About 50% of my portfolio is invested in UK Equities). I also have a 45 year retirement horizon (rather than the 30 year used in Safemax), as I retired at 55 and have planned for a life expectancy of 100 years. 

Completely agree - one of the reasons for looking at UK inflation and UK stocks and bonds (I do have results for a more diverse portfolio, but that's another thread).

I also agree with you that considering Guaranteed Income (particularly where it is index-linked like the state pension) is really important in retirement planning and can make a huge difference to sensible initial withdrawal rates. I retired a year older than you, but took an actuarially reduced partially-indexed DB pension to cover our essential spending between now and state pension age - this means we can be very flexible in our portfolio withdrawals and gradually ramp up the stock content over the first 10 years or so (in the event of my death before my OH gets their state pension, life insurance will cover the income shortfall for them since the DB pension will halve).