Safe withdrawal rates query

lisyloo

i am currently having an uncomfortable time with my recently retired spouse who doesn’t want to listen, so please help and educate me.

i understand that swr is around 4% (some people say it should be less but I’m talking ball park at the moment).
Our investments have done 9% over a long period so we tend to work on an expectation of 6%.

so the question is why the gap?

1) sequence of returns risk?
2) de-risking investments?
3) returns may be lower?
4) all the the above?
5) anything else?

do most MSE’ers drawdown when the market is good (assuming you have enough liquidated to live on)? Rather than go monthly?
does this mitigate sequence of returns risk?

Tassie_Devil

Have you read this article? it addresses some of your questions: https://monevator.com/how-to-choose-an-swr-for-your-isa-and-your-pension-to-hit-financial-independence-fast/

ewaste

All of the above and the whole point in a safe withdrawal rate is that it's "Safe". There is minimal risk that you will run out of money too soon even with inflationary increases given historical backtesting of available data. We've arguably had a somewhat historically unprecedented bull run across multiple assets from Equity, Bonds and more physical commodities/assets. 

Higher withdrawals when things are good is only going to exacerbate sequence of returns risk. It will also exacerbate how far below a SWR you'll need to cut in order to survive the bad periods. There are rules based variable SWR rate models e.g. Guyton-Klinger.

jim8888

I've wondered on the 4% rule too. I suspect it's quite low and I wonder often about what I'll be spending in my sixties versus my eighties (providing I see the latter!) Shouldn't I withdraw a bit more when I'm "younger" based on my suspicion that my ability and desire to spend in the older years will be a lot different than the 4% allows. For modelling though, I do tend to use 4% as that seems to be the considered opinion of smart people who've done a lot of historical analysis on the subject.

DT2001

ewaste said:

Higher withdrawals when things are good is only going to exacerbate sequence of returns risk. It will also exacerbate how far below a SWR you'll need to cut in order to survive the bad periods. There are rules based variable SWR rate models e.g. Guyton-Klinger.

Can you explain that numerically as I assumed if you use Prime Harvesting you rebalance when the market is high which helps sustain a higher overall SWR?

DT2001

The gap is because as you say recent bull market and SWR’s are based on much longer term data.

I’m yet to start drawdown but I would ask how you define “when markets are good”? I think you have to have a plan at day 1 and stick to it. The idea IMO is to avoid failure and not to be richer when you die.

DT2001

jim8888 said:

I've wondered on the 4% rule too. I suspect it's quite low and I wonder often about what I'll be spending in my sixties versus my eighties (providing I see the latter!) Shouldn't I withdraw a bit more when I'm "younger" based on my suspicion that my ability and desire to spend in the older years will be a lot different than the 4% allows. For modelling though, I do tend to use 4% as that seems to be the considered opinion of smart people who've done a lot of historical analysis on the subject.

If you look at tassie_devils link and the part about splitting ISA and SIPP withdrawal rates as, in their plan, it covers differing time scales and allocates differing drawdown rates. A friend of mine as tweaked his spreadsheet to assume a  gradual reduction in spending post 75. We each have our own SWR however the difficulty is working it out and building in flexibility as reality never matches our nice steadily increasing investment pots!

zagfles

The point of the SWR is that it's supposedly "safe" (although many believe it to really be about 3.5% or so outside the US, most studies are US biased). The "gap" is probably because your "long period" isn't actually very long and ends at what is probably a good time.

Over the last 10 years equities and bonds have made very good returns. Even if your "long period" looks back 20 or 30 years, the effect of the last 10 years' good returns will make the overall return look good. But that only reflects today looking back.

Now look at other periods, like the 10 years from 2000-2010. Equities fell over that 10 year period. How would you cope if that repeated from now until 2032? Or worse? The Japanese stock market is lower now than it was in 1989, over 30 years ago. Whose to say the last 10 years weren't a big bubble and equities will return to around 2010 values? Bubbles are only easy to spot with hindsight.

We've had a few recent threads discussing market timing and dynamic asset allocation (where the % of equities, cash, bonds etc varies with market conditions). Some people have a "cash buffer" strategy where they hold cash which they'll spend rather than selling equities if they think equities are low, but apparently using a "finger in the air" rather than any objective analysis, others use a more structured and longer term approach like Prime Harvesting.

Short term market timing (eg "I won't sell today, the market is low, I'll wait till tomorrow/next week/month") is a mugs game. If you're capable of calling the market short term and aren't a billionaire you're deluded. 

Albermarle

lisyloo said:

i am currently having an uncomfortable time with my recently retired spouse who doesn’t want to listen, so please help and educate me.

i understand that swr is around 4% (some people say it should be less but I’m talking ball park at the moment).
Our investments have done 9% over a long period so we tend to work on an expectation of 6%.

so the question is why the gap?

1) sequence of returns risk?
2) de-risking investments?
3) returns may be lower?
4) all the the above?
5) anything else?

do most MSE’ers drawdown when the market is good (assuming you have enough liquidated to live on)? Rather than go monthly?
does this mitigate sequence of returns risk?

The SWR of 4%/3.5% is based on something like you only will have a 5% chance of running out of money when you are 95. On the other side there is a good chance you will die with still a big pot.
If you take a higher % withdrawal rate then it does not mean definite disaster , only that the chance of running out increases, and the chance of leaving a big pot decreases.
You can partly mitigate this by having periods of lower withdrawal rates , especially if the market is in a slump. 
Our investments have done 9% over a long period so we tend to work on an expectation of 6%.
How about the last 12 months ? Probably just keeping up with inflation for the next few years is most peoples goal .

andyjb999

Good article here that I have found useful.

https://investor.vanguard.com/investor-resources-education/campaign/investor-series/setting-a-strategy-for-retirement-withdrawals

Albermarle

andyjb999 said:

Good article here that I have found useful.

https://investor.vanguard.com/investor-resources-education/campaign/investor-series/setting-a-strategy-for-retirement-withdrawals

I used to have a bookmark of this and lost it , so thanks ! If you click on the link 'Learn more about dynamic spending' near the end it goes into more detail for the people who like that sort of thing.