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

MK62

Audaxer said:

I think most retirees that start on a 4% withdrawal rate will use it as a guide, and most will have a cash buffer to stop them drawing down from their portfolios during equity crashes. I have read than in most cases retirees end up with a bigger pot than they started with, due to them taking too safe an approach.

Yes, that could be an issue in some circumstances......there's nothing wrong with reviewing things every year or couple of years though.......eg in year 1 push your numbers into your SWR grinder of choice with a 30yr retirement......then a year later push your latest numbers through with a 29yr retirement and see what number pops out......add a few upper and lower guardrails and......hang on, this is sounding like a VPW plan.....😉😆

Sea_Shell

Audaxer said:

I think most retirees that start on a 4% withdrawal rate will use it as a guide, and most will have a cash buffer to stop them drawing down from their portfolios during equity crashes. I have read than in most cases retirees end up with a bigger pot than they started with, due to them taking too safe an approach.

I'll let you know in 10 yrs time 😉😇

Audaxer

Sea_Shell said:

Audaxer said:

I think most retirees that start on a 4% withdrawal rate will use it as a guide, and most will have a cash buffer to stop them drawing down from their portfolios during equity crashes. I have read than in most cases retirees end up with a bigger pot than they started with, due to them taking too safe an approach.

I'll let you know in 10 yrs time 😉😇

By then you'll be enjoying your DB pensions and watching your pot grow
 

Audaxer

MK62 said:

Audaxer said:

I think most retirees that start on a 4% withdrawal rate will use it as a guide, and most will have a cash buffer to stop them drawing down from their portfolios during equity crashes. I have read than in most cases retirees end up with a bigger pot than they started with, due to them taking too safe an approach.

Yes, that could be an issue in some circumstances......there's nothing wrong with reviewing things every year or couple of years though.......eg in year 1 push your numbers into your SWR grinder of choice with a 30yr retirement......then a year later push your latest numbers through with a 29yr retirement and see what number pops out......add a few upper and lower guardrails and......hang on, this is sounding like a VPW plan.....😉😆

If someone was fully invested and in the first year of retirement their pot grows by say 15% or more, would they consider drawing down much more than 4%, to keep some of the cash in a buffer for leaner years?

[Deleted User]

Seems to be mixing of the “bucket” and “SWR” strategies in the comments.

If one “withdraws” and keeps money in cash, all he has achieved was to change asset allocation.  Cash is part of the fixed income portion of the overall portfolio.

Buckets are a helpful psychological game but the real answer is to reduce spending during major bears and to increase it during bulls.  

While SWR is a mirage, safety is achievable by having DB/annuity-like income to cover the basics and realizing that investment withdrawal rate will have to vary. 

Terron

Cus said:

Terron said:

Deleted_User said:

IMHO SWR is mathematical nonsense because it assumes a constant withdrawal  from a highly variable pot. It’s counterproductive but heart-warming therefore popular. 

No, it is not nonsense. It is an attempt to emulate the gold standard of pensions - a fully indexed DB pension - using a DC pot. There may be better alternatives, but that was a sensible place to start.

But DB pensions are invested in a similar way to annuities, in that the providing firm has to ensure you are going to be paid for as long as you need. So for me, the only safe withdrawal rate is likely to be similar to what you can get from the annuity market.

It is heart warming to think you can take x% and most scenarios play out in your favour, but if it was that simple, firms would offer annuities based on equity investments, but they can't/don't.

The person who came up with the idea was being asked questions like how much do I need to save for retirement at a time when there was no research on it, but historical data had recently become available. He took a fully indexed DB pension as a model of an ideal pension and simple investment scheme (50/50 equity/bonds), assumed a 30 year retirement and used the historical data to work out what percentage you could have taken throughout the history that was available to him and worked for any starting date. Just over 4% worked even for the worst case. 
The historical data has been extended and other investment strategies modelled and the 4% number still works. for most cases. It has also been tried for other countries than the US and the results generally a bit worse. 3.5% is the UK equivalent. 
A single life, 5 year guaranteed, RPI indexed UK annuity for a 65 year old currently (6 Oct) gives ~4.1% - so better than the SWR. Of course in that case any excess goes to the supplier not your heirs, so that is as I would expect.

Linton

Deleted_User said:

Seems to be mixing of the “bucket” and “SWR” strategies in the comments.

If one “withdraws” and keeps money in cash, all he has achieved was to change asset allocation.  Cash is part of the fixed income portion of the overall portfolio.

Buckets are a helpful psychological game but the real answer is to reduce spending during major bears and to increase it during bulls.  

While SWR is a mirage, safety is achievable by having DB/annuity-like income to cover the basics and realizing that investment withdrawal rate will have to vary. 

Having to reduce spending during major bears and increasing during bulls represents a failure of retirement financial strategy. It is a form of market timing and suffers from its downsides.

How do you know when you are in a major bear period?  How long do you wait until you are sure? Are we in one now? How do you know when it is over? Similarly with a bull market. 

One cannot simply instantly turn expenditure on and off. Any decision to cut expenditure could take months to make a meaningful difference. What sort of measures do you suggest? Something trivial like buying cheaper bottles of wine as part of your regular shopping? Or make a major change to your diet and turn off the winter central heating? What do you do to increase expenditure? Book a world cruise for a year’s time? And then cancel it if global economic circumstances change? Do you increase expenditure even if there is nothing you really want? That would be foolish, but if you don’t perhaps the subsequent bear cut would not be necessary.

Yes, having a cash and/or low risk bucket is asset allocation. Surely it makes sense to base your asset allocation on your objectives rather than satisfying an arbitrary fixed %. 

MK62

Audaxer said:

MK62 said:

Audaxer said:

I think most retirees that start on a 4% withdrawal rate will use it as a guide, and most will have a cash buffer to stop them drawing down from their portfolios during equity crashes. I have read than in most cases retirees end up with a bigger pot than they started with, due to them taking too safe an approach.

Yes, that could be an issue in some circumstances......there's nothing wrong with reviewing things every year or couple of years though.......eg in year 1 push your numbers into your SWR grinder of choice with a 30yr retirement......then a year later push your latest numbers through with a 29yr retirement and see what number pops out......add a few upper and lower guardrails and......hang on, this is sounding like a VPW plan.....😉😆

If someone was fully invested and in the first year of retirement their pot grows by say 15% or more, would they consider drawing down much more than 4%, to keep some of the cash in a buffer for leaner years?

Possibly, but it depends on their plan - they might already have a fully armed cash buffer....it would be nice to have that choice though........

Sorry, just re-read......if this retiree was fully invested in the first year, then I'd suggest that he/she had already decided to go without a cash buffer, so I'm not sure they'd want to switch to one tbh.....but they'd have the choice to do so if  they wanted to..

michaels

Linton said:

Deleted_User said:

Seems to be mixing of the “bucket” and “SWR” strategies in the comments.

If one “withdraws” and keeps money in cash, all he has achieved was to change asset allocation.  Cash is part of the fixed income portion of the overall portfolio.

Buckets are a helpful psychological game but the real answer is to reduce spending during major bears and to increase it during bulls.  

While SWR is a mirage, safety is achievable by having DB/annuity-like income to cover the basics and realizing that investment withdrawal rate will have to vary. 

Having to reduce spending during major bears and increasing during bulls represents a failure of retirement financial strategy. It is a form of market timing and suffers from its downsides.

How do you know when you are in a major bear period?  How long do you wait until you are sure? Are we in one now? How do you know when it is over? Similarly with a bull market. 

One cannot simply instantly turn expenditure on and off. Any decision to cut expenditure could take months to make a meaningful difference. What sort of measures do you suggest? Something trivial like buying cheaper bottles of wine as part of your regular shopping? Or make a major change to your diet and turn off the winter central heating? What do you do to increase expenditure? Book a world cruise for a year’s time? And then cancel it if global economic circumstances change? Do you increase expenditure even if there is nothing you really want? That would be foolish, but if you don’t perhaps the subsequent bear cut would not be necessary.

Yes, having a cash and/or low risk bucket is asset allocation. Surely it makes sense to base your asset allocation on your objectives rather than satisfying an arbitrary fixed %. 

Surely the only alternatives are either an index linked annuity (used to be extremely expensive in comparison, probably still expensive for a joint life) or an SWR that potentially leaves a huge pot as expenditure is never increased (plus as we know there is no such thing as an SWR for the future, only the past and even in the past, some scenarios that ended up as 'safe' saw considerable early asset depletion where it would be unlikely that the retiree would have risked carrying on with a withdrawal rate that eventually (unexpectedly) turned out to be safe.

Most people in life have had experience of adjusting expenditure - perhaps big pay rises and overtime, redundancy and maternity/paternity leave, whilst you are working you do not know for the rest of your life what you will earn and you cope.  Rather than trying to lock in a fixed for ever income it might make more sense to try and lock in an acceptable income and accept that beyond that there will be fluctuations.

(Says the guy who has joined the civil service shortly before retirement in order to transfer in a sizeable chunk of his BC pension into an index linked DB scheme, but also leaving a decent sized DC pot.  DB will be about 13k with 100% spouse from age 55 plus 2x full state pension plus of order 500-700k DC to which an adjusted SWR strategy will be applied the level of which will determine choices like cars, holidays etc.  Kids will get a 6-figure deposit contribution from downsizing but any left over pension will be a nice to have for them not a requirement)

[Deleted User]

Linton said:

Deleted_User said:

Seems to be mixing of the “bucket” and “SWR” strategies in the comments.

If one “withdraws” and keeps money in cash, all he has achieved was to change asset allocation.  Cash is part of the fixed income portion of the overall portfolio.

Buckets are a helpful psychological game but the real answer is to reduce spending during major bears and to increase it during bulls.  

While SWR is a mirage, safety is achievable by having DB/annuity-like income to cover the basics and realizing that investment withdrawal rate will have to vary. 

Having to reduce spending during major bears and increasing during bulls represents a failure of retirement financial strategy. It is a form of market timing and suffers from its downsides.

How do you know when you are in a major bear period?  How long do you wait until you are sure? Are we in one now? How do you know when it is over? Similarly with a bull market. 

One cannot simply instantly turn expenditure on and off. Any decision to cut expenditure could take months to make a meaningful difference. What sort of measures do you suggest? Something trivial like buying cheaper bottles of wine as part of your regular shopping? Or make a major change to your diet and turn off the winter central heating? What do you do to increase expenditure? Book a world cruise for a year’s time? And then cancel it if global economic circumstances change? Do you increase expenditure even if there is nothing you really want? That would be foolish, but if you don’t perhaps the subsequent bear cut would not be necessary.

Yes, having a cash and/or low risk bucket is asset allocation. Surely it makes sense to base your asset allocation on your objectives rather than satisfying an arbitrary fixed %. 

Confused. How is changing withdrawal amount = a “failure of retirement strategy” if your strategy is variable withdrawal?

How do I know I am in a bear market?  By reading the definition of a bear market and comparing stock falls to peak value.  Although strictly speaking, the 20% number is irrelevant.  I don’t wait.  I follow a strategy called “variable percentage withdrawal”.  

Some of the expenditure you can’t turn on and off, as per my original comment (eg food bills or insurance costs).  Those should really be covered from Db/annuity type of income.  

Others you can.  Vacations. Donations. Large gifts. New cars. Hobby purchases.  Thats why its called “discretionary spending”. And you don’t need to “turn off”.  We are talking about reduction, and most variable strategies involve amortization, so it won’t be 90% reduction even if the market falls 90%. 

And yes, I do think it makes sense to spend more during the good times.  Because being left with a massive portfolio is also a type of planning failure, albeit not as catastrophic as going hungry because you ran out if money. 

I think we are moving away from the basic point.   Which is that it is mathematically impossible to guarantee a constant rate of withdrawal from a highly variable portfolio of stocks and bonds.  I don’t for a second believe an individual whose portfolio drops 90% would continue spending at the exact same rate as prior to the crash.  If I had a million today and 100K next year, there is zero chance I would say “yep, 40K is a safe way to spend”. Does not mean the drop has to be proportional mind you, “variable” is not the same as “proportional”. 

Conversely a portfolio which goes up by a factor of 10 would trigger purse loosening in most cases.