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

Linton

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....

The value of the SWR failure rate is based on a small number of relatively rare major events, particularly ones that occur at inconvenient times such as the start of retirement.  With a 100% SWR safety requirement most people, most of the time, basing their actual withdrawals on SWR would have died much richer in real terms than when they started living off their investments.

Using the default settings of cfirecalc, with a $750K pot the highest annual withdrawal for 100% success is between $26950 and $27000.  But at $26950 (3.59% SWR) the average pension pot after 30 years is $1,665,302.  The pot values are in terms of the $ as at the start of the 30 year period.

At $35000 withdrawal(4.67%) the success rate is 79.5% and the average pot size after 30 years is $1,010,538, still significantly more than the value at the start.  Planning retirement on the basis that you are likely to end up richer in death than when you retire seems bizarre.

cFirecalc bases its calculations on modelling every 30 year period since 1871.  That brings in further distortions. For example, during that time there were 2 world wars.   I calculate that about 50% of all 30 year periods include at least 1 year of world war.  Does the chance of a world war influence your retirement plans?  The variation in SWRs arising from your choice of acceptable historic  % failure  is further broadened by the future unknowns.  About all we can be sure if is that the next 30 years will be very different to those on which the SWR is calculated.

Secret2ndAccount

coyrls said:

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.

I don't think you need to be that brave. Remember, the worst thing* that can happen to your plan is a collapse in the value of your pot in the first few years. So, if you've survived a year or two without the great collapse, you could be heading to be one of those who ends up with more money than they started with. So it's quite safe to increase your withdrawal amount, because you're not increasing your withdrawal %. Actually, you get a small increase in withdrawal %, because you have less years left to survive compared to a fresh retiree. So you can take out more than them from the same size pot.

* one of the worst things, for there are several.

Linton

Secret2ndAccount said:

coyrls said:

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.

I don't think you need to be that brave. Remember, the worst thing* that can happen to your plan is a collapse in the value of your pot in the first few years. So, if you've survived a year or two without the great collapse, you could be heading to be one of those who ends up with more money than they started with. So it's quite safe to increase your withdrawal amount, because you're not increasing your withdrawal %. Actually, you get a small increase in withdrawal %, because you have less years left to survive compared to a fresh retiree. So you can take out more than them from the same size pot.

* one of the worst things, for there are several.

I think the withdrawal % is very much a secondary figure only useful as a sanity check.   As a retiree I focus on a constant withdrawal value (inflation adjusted) currently fully provided by guaranteed income and income funds  and use that for future modeling.  Increasing our day to day standard of living in our 70's is not something that holds much attraction.

The constraint is that there is ample money left at assumed age of death based on assumed investment return and inflation rate.  The current assumed annual withdrawal value is well above that needed for normal expenditure and excess money in the pot is generally used for one-offs - eg major holidays, cars, house improvements etc.

coyrls

Secret2ndAccount said:

coyrls said:

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.

I don't think you need to be that brave. Remember, the worst thing* that can happen to your plan is a collapse in the value of your pot in the first few years. So, if you've survived a year or two without the great collapse, you could be heading to be one of those who ends up with more money than they started with. So it's quite safe to increase your withdrawal amount, because you're not increasing your withdrawal %. Actually, you get a small increase in withdrawal %, because you have less years left to survive compared to a fresh retiree. So you can take out more than them from the same size pot.

* one of the worst things, for there are several.

Yes, but it feels dangerous to have a variable withdrawal rate strategy that only ratchets up above inflation and never dips below an inflation rate increase.  However it would reduce the large increases in funds that can happen in some circumstances.

DT2001

The 100% safe SWR is based on past figures. So, in theory, differences between 6 months ago and now will be the value of the pot left over and not if it fails.

Adopting a simplistic increasing (by inflation) amount is OK as a starting point but it needs to be accompanied by guidelines/rules for when your the smoothly increasing investment pot (from your forecast) does not materialise. It is up to you where to put your parameters.

The key as has already been said is how flexible you can be with spending. If you can not you have options of a lower starting point or buying in guaranteed income (via an annuity?).

We each have our own SWR as our circumstances are individual however if you have your checklist - risk aversion, flexibility, health, future expected/possible ‘capital’ events such as inheritance or downsizing you can better plan.

cfw1994

Just to resurrect this thread in light of another chat.
One thing we have 100% as a fact….at some point in our future, we *will* shuffle off our mortal coil.  Sorry to be blunt about this 😳

Each year we chose to continue working means one less of not working 🫣

For those who are happy working, who have a work-life balance that they enjoy - crack on 😎   No need to worry about SWR at all 👍
For those who have lots they want to get on with away from work….this discussion is important, to figure out how much you can draw down from a pot 👀

I think DT nails it, & most important is to be flexible 🤷‍♂️

Remember, once retired, you can travel at off-peak times, do things that cost less, spend more time shopping for bargains 💪

Good luck all 🍻

Pat38493

Linton said:

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....

The value of the SWR failure rate is based on a small number of relatively rare major events, particularly ones that occur at inconvenient times such as the start of retirement.  With a 100% SWR safety requirement most people, most of the time, basing their actual withdrawals on SWR would have died much richer in real terms than when they started living off their investments.

Using the default settings of cfirecalc, with a $750K pot the highest annual withdrawal for 100% success is between $26950 and $27000.  But at $26950 (3.59% SWR) the average pension pot after 30 years is $1,665,302.  The pot values are in terms of the $ as at the start of the 30 year period.

At $35000 withdrawal(4.67%) the success rate is 79.5% and the average pot size after 30 years is $1,010,538, still significantly more than the value at the start.  Planning retirement on the basis that you are likely to end up richer in death than when you retire seems bizarre.

cFirecalc bases its calculations on modelling every 30 year period since 1871.  That brings in further distortions. For example, during that time there were 2 world wars.   I calculate that about 50% of all 30 year periods include at least 1 year of world war.  Does the chance of a world war influence your retirement plans?  The variation in SWRs arising from your choice of acceptable historic  % failure  is further broadened by the future unknowns.  About all we can be sure if is that the next 30 years will be very different to those on which the SWR is calculated.

I would have thought that whether you aim for 100% or a lower number, is also partly dependent on how many other levers you can pull to adjust things if you face the worst case scenario.  e.g. you may have the option to downsize or equity release in worse case sceanrio and be prepared to accept that risk.  That's why I even heard IFAs saying that it's ok to retire at 85-90% probability, depending on your overall situation.

There is also a small dependency on current market conditions, at least historically.  If you are retiring at the top of the market (e.g. now), arguably you should shoot for a higher percent.

Also you have to keep in mind that even if you retire at 100%, some time in the first 5 years if you run the numbers it will suddenly be less than 100% due to a crash.  If you are sticking to your guns, theoretically you should not decrease spend as you are already inside your scenario that you chose to follow.

NoMore

100% is not a guarantee that it will work, just that it would have worked in all scenarios from the past. The future is unknown.

Personally I think people get too hung up on playing around in calculators like cfiresim with getting things to go from 90% to 95% to 100% working, when in reality what have you actually achieved ? I'm happy to go with anything that indicates a 85%+ success rate with the proviso that I can flex in the future if need be.

Still think SWR gives you a good indicator that you have enough to retire, but its not good enough and too simplistic to use as an actual drawdown strategy.

SouthCoastBoy

Personally I would not use the SWR as a strategy, but as NoMore states, it is a useful indicator as to whether you have enough. I would also use 3% as my indicator rather than the 4% often stated.

Cobbler_tone

Ultimately no-one knows exactly what is going to happen and when, or else we all would have retired some time ago.

With a backbone of DB, I have 70% in the DC default target fund (which I'd imagine the vast, vast, vast majority of people in WP schemes have 100% in...in fact I know they do in my company and can't see it would be any different elsewhere. A lot of people never even log on!) and moved 30% to a passive world equity fund for a little jeopardy! I might make/lose a few grand here and there. 
If the market(s) crash then it is extremely difficult to fully protect against it with an active fund. I am sure we all saw significant dips (and certainly little growth) over a couple of years recently. So much of it comes down to timing and luck, the same if you are reliant on selling shares.

When the time comes in a couple of years I will definitely move it the securest place possible. My motivation won't be chasing big growth and an element of income will be protected via the DB. It is nigh on impossible to make all of your income and wealth 'inflation proof', unless you have a fully linked DB scheme, which must be becoming more and more of a rarity. 

As long as I can heat my home, eat, run a car and have some nice holidays...the rest is gravy.
Unless they do something radical with the state pension, or the price of beans goes up to £10 a tin, I'm confident in my financial future.