4% SWR rule….well, rules are there to be broken!

BritishInvestor

michaels said:

Had I retired last November, my SWR in April 22 (current) money terms would have been about £42k.

Should I retire today my SWR on the same basis would be more like £38k due to price increases and market falls.

Not sure how useful such a calculation really is given this?!

It's a valid point. One way to think of it.

Had you retired last November, you would've done so with a given "success rate" (e.g 80-90%). At your (annual) review, you would update the retirement plan and update the success rate. If this stays below the desired rate for a long enough period (which would be documented in your withdrawal policy statement - e.g, 2 years), an adjustment to spending might need to be made (and the adjustment will also be documented in the WPS).


https://finalytiq.co.uk/longevity/

"My view is that working to success rate of 80% – 90% is reasonable in retirement income planning"

Dh6

Personally I’d not accept a potential failure rate of 20%. I’d be continuing work until my projections had me at minimum 95% success rate. 

DH

Linton

An SWR failure rate of say 5% vs 10% vs 20%  means nothing.   It could well represent one event that happened in the last 100 years that may or may not be repeated in your remaining lifetime. The difference in %s could be due to when it occurred in the time period on which the figures are based, eg at the start, middle or end.

michaels

Hmm - I always run the SWR models at 100% zero failures.

The point being that it seems odd that what was an SWR 6 months ago is so different to what is an SWR today.  I still hold the same assets it is just prices are higher and the assets are worth less - if a lower annual amount is safe today then perhaps the higher amount wasn't as safe as all that 6 months ago....

NedS

michaels said:

Hmm - I always run the SWR models at 100% zero failures.

The point being that it seems odd that what was an SWR 6 months ago is so different to what is an SWR today.  I still hold the same assets it is just prices are higher and the assets are worth less - if a lower annual amount is safe today then perhaps the higher amount wasn't as safe as all that 6 months ago....

So I guess that's just SOR risks in action? If you had retired last year, and have gotten off to a bad start wrt SOR risks, you may need to make some adjustments in the coming couple of years if things continue to deteriorate.

Conversely, if you were to retire today, just after a market correction, you are starting out with a lower withdraw amount giving your plan a higher safety margin meaning you are less likely to have to make adjustments having already absorbed the correction of the last 12 months (or course things could still get a LOT worse from here).

But in reality, we have seen a small correction, and if a 'SWR' drawdown plan from last year cannot withstand that I think you'd have far bigger problems to worry about, but obviously what happens going forward from here is more likely key to the successful or otherwise outcome.

Secret2ndAccount

I agree with shooting for 100%. There is already the risk that this time is different. That's enough chance of failure for me.
You could still start your drawdown at 42k. If the current situation turns into a bad sequence of returns for you, then you will be stuck on 42k plus inflation, perhaps for the rest of your days.
If you start at 38k, then 2 years, or 5 years, or 10 years down the line, you will review your situation and say 'hmm, I seem to have a lot of my pot left. I can safely increase my withdrawals'. Then you will pay yourself 45 k for the rest of the time.

NedS

BritishInvestor said:

https://finalytiq.co.uk/longevity/

"My view is that working to success rate of 80% – 90% is reasonable in retirement income planning"

Interesting read - thanks.

My view is that a notional SWR is a great starting point or a target to aim for whilst in accumulation but there are way too many factors and differences in people's circumstances and financial goals to make a generalised figure meaningful in drawdown. Consider someone with only DC provision likely to live to 100 with no other assets to fall back on compared to someone with significant DB provision that will more than cover their essential expenditure from 80 onward. The second example may be far more willing and able to accept an 80% success rate at 80 than the first who is far less able to accomodate any sort of failure rate until 100.

bostonerimus

michaels said:

Hmm - I always run the SWR models at 100% zero failures.

The point being that it seems odd that what was an SWR 6 months ago is so different to what is an SWR today.  I still hold the same assets it is just prices are higher and the assets are worth less - if a lower annual amount is safe today then perhaps the higher amount wasn't as safe as all that 6 months ago....

I also wanted 100% success, but then the emphasis comes off investment return and SOR risk and switches to control of spending, inflation and providing guaranteed sources of income. So one solution is for you to have low spending and get your income from index linked DB pensions and SP. Other ways would be if your pot could sustain your spending by simply using cash in a savings account ladder or you bought an annuity.

coyrls

Logically the formula for determining subsequent years’ withdrawals after establishing the value of the first year’s withdrawal should be to increase the withdrawal by the greater of the previous year’s withdrawal plus inflation or a recalculated SWR based on the current pot value.  A recalculation of the SWR would put you in the same position as somebody who retired in the current year with your pot value.

You would need to be a brave person to follow such a strategy though.

BritishInvestor

NedS said:

BritishInvestor said:

https://finalytiq.co.uk/longevity/

"My view is that working to success rate of 80% – 90% is reasonable in retirement income planning"

Interesting read - thanks.

My view is that a notional SWR is a great starting point or a target to aim for whilst in accumulation but there are way too many factors and differences in people's circumstances and financial goals to make a generalised figure meaningful in drawdown. Consider someone with only DC provision likely to live to 100 with no other assets to fall back on compared to someone with significant DB provision that will more than cover their essential expenditure from 80 onward. The second example may be far more willing and able to accept an 80% success rate at 80 than the first who is far less able to accomodate any sort of failure rate until 100.

Yes I agree it's a far more nuanced discussion, but just to add that it's unlikely (hopefully) that someone sleepwalks into a plan failing, and a small nudge to spending, if the plan is under sufficient stress, can make a significant difference.