Safe withdrawal rates query

dunstonh

i understand that swr is around 4% (some people say it should be less but I’m talking ball park at the moment).

There is no SWR.  Just a lot of opinions.

Our investments have done 9% over a long period so we tend to work on an expectation of 6%.

When you say long period, are you talking about a period in excess of 20 years?   If less than that then you really need to adjust your planning as the last 13 years have provided returns higher than the long term average.    The decade before that provided returns below the long term average.

When you plan, you should plan using lower rates with the hope they will be higher but if not, then you haven't relied on that.

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?

Insufficient information to say as you haven't mentioned your investments or timescale.  But likely due to only including the good years and not taking into account the bad and underestimating inflation.

JohnWinder

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!)

Well, you may be able to improve on that, even. Here’s an approach that optimises spending and allows you to die with £1 or £10,000 if you want to:
https://www.bogleheads.org/wiki/Variable_percentage_withdrawal

Thrugelmir

lisyloo said:

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?

Are you comparing apples with oranges?
What are you defining as a long period? 
How many years have you been managing your own investments? 

arnoldy

FTSE All share yield is currently 3.11%. Knock socks off any annuity (and your beneficiaries will receive the capital). Historical data says dividends increase at or above inflation over any reasonable time frame. 
FTSE All-Share FTSE overview | London Stock Exchange

Take natural yield 3%, keep costs low, have a cash buffer (especially if you retire before the State pension) and don't overcomplicate it.

coyrls

arnoldy said:

FTSE All share yield is currently 3.11%. Knock socks off any annuity (and your beneficiaries will receive the capital). Historical data says dividends increase at or above inflation over any reasonable time frame. 
FTSE All-Share FTSE overview | London Stock Exchange

Take natural yield 3%, keep costs low, have a cash buffer (especially if you retire before the State pension) and don't overcomplicate it.

If you're suggesting 100% investment in the FTSE UK All Share index, I would suggest that would not be a good strategy.

Fermion

Your figure of 9% is actually a composite of both yield and growth. The nominal magic 4% figure is probably based on a scenario where there is only limited market growth.

This is one of the reasons way I hold income rather than accumulation funds in my pot so that I can get an accurate measure of the true income yield each year. For my particular pension pot the yield was about 3.4% last year(it was a bit higher pre Covid-19), although the total pot has grown by about 14.5% over the last 5 years. I actually aim to only take the natural yield from my pot each year.

coyrls

Fermion said:

Your figure of 9% is actually a composite of both yield and growth. The nominal magic 4% figure is probably based on a scenario where there is only limited market growth.

This is one of the reasons way I hold income rather than accumulation funds in my pot so that I can get an accurate measure of the true income yield each year. For my particular pension pot the yield was about 3.4% last year(it was a bit higher pre Covid-19), although the total pot has grown by about 14.5% over the last 5 years. I actually aim to only take the natural yield from my pot each year.

SWR has nothing to do with yield vs growth.

OldScientist

arnoldy said:

FTSE All share yield is currently 3.11%. Knock socks off any annuity (and your beneficiaries will receive the capital). Historical data says dividends increase at or above inflation over any reasonable time frame. 
FTSE All-Share FTSE overview | London Stock Exchange

Take natural yield 3%, keep costs low, have a cash buffer (especially if you retire before the State pension) and don't overcomplicate it.

Interestingly, historically income from the natural yield strategy has often not kept up with inflation...

see https://finalytiq.co.uk/natural-yield-totally-bonkers-retirement-income-strategy/

I'm not sure that I would totally agree with the author's use of the word 'bonkers' since retirees with other sources of income (state pension, DB pension, etc.) that cover all or most of their essential spending can put up with highly variable portfolio withdrawals. While I note that the article does not include final portfolio values, my own backtesting results indicate that after 30 years, historical inflation-adjusted final portfolio values lay between about 20% and 200% of the initial portfolio (with a median of about 60%), so the strategy does indeed for the most part leave a reasonable legacy.

lisyloo

Thrugelmir said:

lisyloo said:

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?

Are you comparing apples with oranges?
What are you defining as a long period? 
How many years have you been managing your own investments? 

We don’t manage our own investments. We have an IFA that we’re very happy with.
i am sure his advice will be closer to the consensus 4% and he will take a holistic view of our other assets and lack of requirement to leave anything e.g. we could equity release.
Yes I’m sure it’s incorrect, it’s having a better understanding of why is the aim.

Terron

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?

SWR exists. It is the rate of withdrawal of your accumulated capital that would have been safe throughout recoded history. Safe was originally defined as not running out for 30 years, and the original research was done using US stock market records, looking at how a pension starting in each year would have done. Effectively the SWR is the rate that would have survived the worst year on record. Another assumption is that you try to duplicate a DB pension with your pot, taking a certain level of income (a %age of the pot) and then adjusting it according to inflation. 

The SWR rate given the original assumptions was very close to 4%, so that is what is normally quoted and is useful as a first approximation. Further research has been done changing the assumptions, such as looking at a longer retirement. Using UK records the worst year is in the 1930s and the rate is nearer 3.5% (WW2 was much better for US industry than British.)

The last few years have not been as bad as the 70s - oil crisis, rampant inflation. Yes inflation is predicted to grow to 7% but that would have been considered low in the 70s when it peaked over 20%. The future may turn out to be even worse. SWR assumes that nothing worse than the great depression or the 1970s will happen, which maybe wrong, but I don't think we have a better predictor of the future than the past.

If you think the future will continue to be as good as it has been for the last 20 years for investments then 6% is reasonable.

There are systems which vary your real income to make it safe to start with a higher rate than the SWR.

The best use for the SWR is its inverse. If you can take 4% in retirement you need a pot of at least 25 times your desired income so it gives a target for saving.

Oh, the answer to your question is 5. It is the difference between how returns have been recently and how they have been at the worst time in recorded history (over 100 years).