If an SWR is just that, how come time of retirement can make so much difference?

michaels

So if I had retired last October at market peak, my rest of life SWR income would have been £44k per annum (based on 3.5% SWR plus state pension provision)

Instead I am still working so my likely retired time has gone down but in October 2021 pounds my SWR income is now £36k (10% inflation, 10% fall in my funds).

Is SWR really a useful concept if this can happen?  My alternate self who retired in October 21 would be happily paying himself £48.8k (44k last October, uprated with inflation this October to 48.8k) rising with inflation whereas if now me retired tomorrow I would only be safe to pay myself an index linked £40k pa.

Marcon

michaels said:

So if I had retired last October at market peak, my rest of life SWR income would have been £44k per annum (based on 3.5% SWR plus state pension provision)

Instead I am still working so my likely retired time has gone down but in October 2021 pounds my SWR income is now £36k (10% inflation, 10% fall in my funds).

Is SWR really a useful concept if this can happen?  My alternate self who retired in October 21 would be happily paying himself £48.8k rising with inflation whereas if now me retired tomorrow I would only be safe to pay myself £40k pa.

Because SWR isn't 'just that'. In reality there is no SWR, just a series of endless adjustments and reviews. By the time you find out your SWR was anything but, you've run out of cash...

gravlax

The % SWR only calculates the initial £ amount for year 1. Thereafter you adjust that £ up by the % inflation rate annually. So yes the starting point value of your portfolio matters initially. But you assume it can only start at 3.5%, but the range is probably between 2.5% and 4% depending on how high or low CAPE valuations are, and how many decades you need your funds to last. If CAPE is very low, then your portfolio is probably smaller, but your starting SWR can be higher as a low CAPE infers higher future returns. A high CAPE when starting means your portfolio is bigger but future returns probably lower, so a lower SWR is adviseable.

It's a dynamic assessment not a fixed figure so 3.5% may be more suited to now than the October peak when 3.0% may have been more realistic.

michaels

I would disagree, the 'classic' SWR of the literature was the withdrawal rate that would never have failed regardless of market conditions (either at the start or during the drawdown). 

So the SWR is the 'worst case' - perhaps based on cape, market compared to peak or whatever other adjustment you choose to make there might be a higher safe starting rate but then that is not a classic SWR.

Audaxer

michaels said:

So if I had retired last October at market peak, my rest of life SWR income would have been £44k per annum (based on 3.5% SWR plus state pension provision)

Instead I am still working so my likely retired time has gone down but in October 2021 pounds my SWR income is now £36k (10% inflation, 10% fall in my funds).

Is SWR really a useful concept if this can happen?  My alternate self who retired in October 21 would be happily paying himself £48.8k (44k last October, uprated with inflation this October to 48.8k) rising with inflation whereas if now me retired tomorrow I would only be safe to pay myself an index linked £40k pa.

It's an interesting point. I suppose it could be argued that if you retired now, you could still pay yourself the £48.8k this year, based on 3.5% plus inflation, of last year's starting balance.  The reason I think it would be fairly safe, is that as you didn't retire last year you didn't drawdown anything. If you think of last October's value as your starting balance (even although you hadn't retired), and you drawdown £48.8k this year, it's just the equivalent of drawing £24.4k each year over the 2 years, so probably only a little over 1.75% a year.

I think if you had retired last October it may have been a more difficult decision as to whether to increase your withdrawal rate by the full 10% inflation for this year.

I hope that makes sense.

Linton

SWr is a bad name for the number because it is purely based on data about  the past.  It tells you nothing about the future.  But nothing will tell you about the future so what would have worked in the past is as good a guess as anything else.  In fact a rather better one in that if a particular withdrawal rate did not work out in the past you may not want to use it for future planning.

Sea_Shell

Rightly or wrongly, we keep tally of our annual spends as a % of our pot now and what it is against what we had 12 months ago, on a rolling basis.


It's been mainly under 3% by both metrics, only occasionally going over by a smidgen.

Will be interesting to see how those figures hold up over time.

NedS

Given many global equity funds are yielding around 2% (e.g, VEVE), and 4-4.5% is available from gilts, a balanced portfolio may give you much of the income you need from yield and you may only need to realise a small proportion of income from selling units. If 3% of your 3.5% SWR is coming from yield, you shouldn't need to sell much.

Prism

If we believe in the idea of the SWR then the version of you on £44k year might be playing out the worst case scenario, much like starting in the 1970s, whereas the version of you on £36k is playing it too safe and will likely end up with a bit pot left over. Assuming you don't of course change the plan along the way.

Secret2ndAccount

You could have paid yourself the 48.8k. Assuming you set your back-testing to 0% failure, and assuming the future isn't worse than the back-testing scenarios, you will get to 30 years without running out of money. If you go with 40k then, in 5 years time, maybe you find that your pot has grown (recovered) from 800k to 1 mil, and SWR again tells you you can increase your withdrawals. So you end up back where the 48.8k would have put you. The effect of the higher initial drawdown rate is to leave a smaller pot at the end. This could affect your heirs, but it could affect you too. Most people plug in 30 years for their back-testing. If you live 35 years, you are going to need that leftover pot.
SWR is a good tool for a quick, finger-in-the-air idea of how much you can draw down, so you can see where you are in the ballpark. In my view it's a bit too simple to use it to run your whole life.

DT2001

I think SWR is a starting point for building up a fund. When starting to withdraw I like the more flexible approach such as Guyton Klinger or Prime Harvesting. SWR ignores your funds performance so, especially in todays markets, a flexible approach is IMO better.