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

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  • MK62
    MK62 Posts: 1,738 Forumite
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    edited 11 October 2022 at 7:28AM
    Don't forget to adjust for duration.......when you calculated the SWR last October, you may have assumed eg. 30 years........this October you'd now need to calculate for 29 years, since delaying drawdown will not increase your lifespan.
    In any case, what your issue really shows is that SWR is something of a misnomer.....instead of Safe Withdrawal Rate, it's probably best to view it as Starting Withdrawal Rate, since there is no real way to know what will be "safe" in the future - all we know is what was safe in the past.
    Last October, your plan would have been hit by an early poor sequence of returns......which is probably the biggest risk to most SWR based plans......
  • Audaxer
    Audaxer Posts: 3,547 Forumite
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    MK62 said:
    Don't forget to adjust for duration.......when you calculated the SWR last October, you may have assumed eg. 30 years........this October you'd now need to calculate for 29 years, since delaying drawdown will not increase your lifespan.

    I think another way to look at it is to keep the effective starting date as October 2021, but for year 1 there was no drawdown, so it would seem fairly safe to drawdown £48.4k in year 2 (£3.5k plus inflation). I see that the OP is still working, so if they do not actually retire until say October 2023 and do not start drawdown to year 3, I think it is even safer to draw 3.5% plus inflation on the original starting balance for the next 28 years.
  • OldScientist
    OldScientist Posts: 812 Forumite
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    edited 11 October 2022 at 10:17AM
    NedS said:
    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.
    The problem with the natural yield approach is inflation - what might be 3.5% this year, will, in the absence of capital growth (which will be absent for bonds since the coupons are being spent), in real-terms be worth 3.15% next year (with current 10% inflation) and so on.

    Abraham Okusanya backtested this approach with UK data (the results are at https://finalytiq.co.uk/natural-yield-totally-bonkers-retirement-income-strategy/). While I disagree with his use of the word 'bonkers' since the income from natural yield is no more variable than that for any other percentage of portfolio approach, it would require a retiree to have a significant amount of their essential spending covered by guaranteed income such as the state pension, DB pension and/or RPI-linked annuity or, as he says, to have a sufficiently large portfolio such that even in the lean years it still provides sufficient income to live off.

  • michaels
    michaels Posts: 29,083 Forumite
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    Both scenarios were run with 0% failure risk (based on historic actuals obviously) to age 95 - I think once you go over 30 years adding or subtracting one year makes very little difference to the SWR.

    I wonder for a US investor who has potentially seen a 25% fall in their pension pot if invested in US shares and bonds and almost 10% inflation whether this might be one of the worst one year performance hits ever, the point being that the historic data set is limited and the economy has been far from 'steady state' in the period so it is not really surprising that we will see 'out of range' events in the future.
    I think....
  • michaels
    michaels Posts: 29,083 Forumite
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    So here is a very good answer using empirical data and suggesting that:
    1) The 'fix and forget' SWR should take into account the current level of the market (specifically the CAPE)
    2) A more complex strategy using an annually adjusted withdrawal rate that includes the CAPE in each years' recalculation will give a higher overall withdrawal with lower volatility than a fixed percentage of pot rule, or the same rule that does not adjust for the CAPE

    The 4% Rule Works Again! An Update on Dynamic Withdrawal Rates based on the Shiller CAPE – SWR Series Part 54 – Early Retirement Now
    I think....
  • GazzaBloom
    GazzaBloom Posts: 819 Forumite
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    edited 12 October 2022 at 2:20PM
    Vanguard researched this and developed some rules they call "Dynamic Spending" similar to the Guyton Guardrails, may be worth a look:

    Four steps to a successful retirement: How to safeguard your retirement spending| Vanguard UK Investor (vanguardinvestor.co.uk)
  • michaels
    michaels Posts: 29,083 Forumite
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    edited 12 October 2022 at 3:11PM
    Vanguard researched this and developed some rules they call "Dynamic Spending" similar to the Guyton Guardrails, may be worth a look:

    Four steps to a successful retirement: How to safeguard your retirement spending| Vanguard UK Investor (vanguardinvestor.co.uk)
    Sort of useful (I think it is a VPR guardrail approach, a bit like GK) but they give no indication of what portfolio strategy they use nor what data set they back test against.

    (Also interesting their examples, I model 0 percent failure historically over a 40+ year time horizon, 85% over 30 years is not acceptable to me!!!)
    I think....
  • GazzaBloom
    GazzaBloom Posts: 819 Forumite
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    edited 12 October 2022 at 3:25PM
    michaels said:
    I wonder for a US investor who has potentially seen a 25% fall in their pension pot if invested in US shares and bonds and almost 10% inflation whether this might be one of the worst one year performance hits ever, the point being that the historic data set is limited and the economy has been far from 'steady state' in the period so it is not really surprising that we will see 'out of range' events in the future.
    That's an interesting point, if a US retiree is using a SWR and taking annual withdrawals, they would have taken an increased amount at the turn of the year not realising what was about to unfold. 2022 is a good year for withdrawal rules to be tested!

    Does anyone drawing a DC pension sleep soundly at night?  :)
  • MK62
    MK62 Posts: 1,738 Forumite
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    michaels said:
    I wonder for a US investor who has potentially seen a 25% fall in their pension pot if invested in US shares and bonds and almost 10% inflation whether this might be one of the worst one year performance hits ever, the point being that the historic data set is limited and the economy has been far from 'steady state' in the period so it is not really surprising that we will see 'out of range' events in the future.
    That's an interesting point, if a US retiree is using a SWR and taking annual withdrawals, they would have taken an increased amount at the turn of the year not realising what was about to unfold. 2022 is a good year for withdrawal rules to be tested!

    Does anyone drawing a DC pension sleep soundly at night?  :)
    Yep.......hello cash buffer!
    Seriously though, I suppose anyone drawing their income from investments will have varying degrees of concern over inflation and investment returns at this time.....my concern is not at a level where any sleep will be lost, at least not yet anyway, but that might change if this level of inflation and returns persists for several years. Yes, I can reduce spending in the future, and therefore withdrawals, but I won't pretend I'd be particularly happy about it tbh.


  • NedS
    NedS Posts: 4,429 Forumite
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    michaels said:
    I wonder for a US investor who has potentially seen a 25% fall in their pension pot if invested in US shares and bonds and almost 10% inflation whether this might be one of the worst one year performance hits ever, the point being that the historic data set is limited and the economy has been far from 'steady state' in the period so it is not really surprising that we will see 'out of range' events in the future.
    That's an interesting point, if a US retiree is using a SWR and taking annual withdrawals, they would have taken an increased amount at the turn of the year not realising what was about to unfold. 2022 is a good year for withdrawal rules to be tested!

    Does anyone drawing a DC pension sleep soundly at night?  :)
    I'm using an income approach, so in theory I shouldn't care what the value of my pot is doing (was up, now down atm) as it's all just noise as long as the dividends keep rolling in. Doesn't stop me looking though!
    What helps me sleep better at night is the knowledge that much of my income needs are met from other sources (SP/DB) so I am not dependent upon the performance of my DC pot.
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