SWR Question

Pat38493

I have a question about the SWR.

I've seen all the debates and comments about 3%, 4%, 3.5% and so on.

What I'm not clear on is whether SWR is supposed to mean:

- The amount I can safely take out and never run out of money, even if I became immortal. (i.e. it's basically just using the initial capital to generate an inflation linked income).
- The amount I can safely take out and most likely run out of money after a certain time e.g. 30 or 40 years?

Also are these studies generally based on worst case history or median?

 

NoMore

The original and probably most mentioned SWR of 4% was based on a study of historical USA data, such that you would be left with at least $1 after any 30 year period using a 50/50 split of USA assets and bonds.

As to how relevant that is for UK  and how valid it could be going forward is endlessly debated and so explains a bit why other percentages could be quoted, however the basis of all those other percentages I'm not sure of.

[Deleted User]

The original SWR “study” was based on a 30 year fund “survival”. It probabilistically sampled historic data in the US for something like 100 years ending in the 90s, accounting for the worst periods. Of course during that time US progressed from an emerging economy to world’s economic superpower.  So, the original SWR assumes you have a 60/40 portfolio of US stocks and bonds. 

The premise of SWR is mathematically nonsensical. A constant withdrawal from a highly variable portfolio is never really “safe”.  And 100 years of data can’t predict next 30 with any degree of confidence.

squirrelpie

SWR is pretty useless for real-life use, except as a very rough and ready way of guessing whether you have 'enough' saved. Rather than worry about the details of how it's calculated and what it means, it would probably be better to read about more sophisticated withdrawal plans such as Guyton-Klinger. It's also always worth bearing in mind the distinction between 'must-have' income to cover the basics and 'nice-to-have' income for anything else. The 'must-have' income stream needs to be guaranteed every year, whilst the 'nice-to-have' can be allowed to vary somewhat.

JohnWinder

You’ve read the debates, now try the one page overview:
https://www.bogleheads.org/wiki/Safe_withdrawal_rates

Albermarle

Pat38493 said:

I have a question about the SWR.

I've seen all the debates and comments about 3%, 4%, 3.5% and so on.

What I'm not clear on is whether SWR is supposed to mean:

- The amount I can safely take out and never run out of money, even if I became immortal. (i.e. it's basically just using the initial capital to generate an inflation linked income).
- The amount I can safely take out and most likely run out of money after a certain time e.g. 30 or 40 years?

Also are these studies generally based on worst case history or median?

 

In very basic terms, it is based on probabilities based on historical statistics.

The SWR  is approx based on that over 30 years, you would only have a 5% chance of running out ( or some similar figures) . Depending on how markets were over that period, there is a large range of other possible outcomes, Such as your pot being about the same as when you started, or being bigger, or being 25% smaller, 75% gone etc.

As mentioned above, it is all a bit theoretical but that is how I understand the basic theory. It is about having a withdrawal rate that minimises your chance of running out even during a long drawn out poor market period(s)

Linton

Pat38493 said:

I have a question about the SWR.

I've seen all the debates and comments about 3%, 4%, 3.5% and so on.

What I'm not clear on is whether SWR is supposed to mean:

- The amount I can safely take out and never run out of money, even if I became immortal. (i.e. it's basically just using the initial capital to generate an inflation linked income).
- The amount I can safely take out and most likely run out of money after a certain time e.g. 30 or 40 years?

Also are these studies generally based on worst case history or median?

 

SWR is based in not running out of money when taking a steady inflation linked income from a 60/40 portfolio in any 30 year period in the past 100+ years.  So worst case.

Some problems
- In those cases where you dont run out of money there is a high probability that you end up with more in your pot than you started with. 
-100 years of data sounds convincing  but that means only 3 completely distinct cases.
 - as @Deleted_User points out the oft quoted results are based on a unique period of US investment and economic circumstances.. The relevence to current UK investors is unknown.

So the predictive value of SWR is minimal and there is no guarantee that the "Safe Withdrawal Rate" is actually safe.,

squirrelpie said:

SWR is pretty useless for real-life use, except as a very rough and ready way of guessing whether you have 'enough' saved. Rather than worry about the details of how it's calculated and what it means, it would probably be better to read about more sophisticated withdrawal plans such as Guyton-Klinger. It's also always worth bearing in mind the distinction between 'must-have' income to cover the basics and 'nice-to-have' income for anything else. The 'must-have' income stream needs to be guaranteed every year, whilst the 'nice-to-have' can be allowed to vary somewhat.

Exactly,  It provides a useful sanity check but not something to base your future on.

Pat38493

Thanks all,

I guess in the end this is also pretty useless for most UK people as most people will have a state pension kicking in at some point, plus many might have at least some small level of DB pension available to activate.  As such, trying to use flat withdrawal rates wouldn't be realistic anyway.

Especially if you retire early you are likely to be taking a higher % from DC funds in the earlier years in many situations.

I was reading the book DIY Pensions which was recommended on this forum.  I found it very useful but there were a few points that seemed a bit odd - on one page it seemed to recommend that you should calculate your savings that you need to get your desired withdrawals, and you should ignore your state pension unless you are retiring close to your SP date - however this means you would end up saving too much and isn't this what spreadsheets were invented for?

NedS

Pat38493 said:

Thanks all,

I guess in the end this is also pretty useless for most UK people as most people will have a state pension kicking in at some point, plus many might have at least some small level of DB pension available to activate.  As such, trying to use flat withdrawal rates wouldn't be realistic anyway.

Especially if you retire early you are likely to be taking a higher % from DC funds in the earlier years in many situations.

Yes, you will be required to build more complex models to account for the inclusion of guaranteed income streams entering your cash flows at various stages during retirement, and counting towards your desired target income.

One way to do this is to assign your DC pension into pots to meet specific needs during specific periods. You may have a pot to meet the needs pre-DB/SP (bridging), a lesser need post-DB but pre-SP, and a lesser again period post-DB/SP depending at what ages DB/SP assets kick in (I know we have various DBs at 60, 62, 63.5 and 65, with SPs at 67 which all need to be modelled).

[Deleted User]

Canadian spreadsheets in the linked finiki can be adapted to UK. They calculate the additional  “bridging” withdrawals until such a time when state pension becomes available. 

This particular method is based on variable percentage withdrawal method (VPW), designed to guarantee you don’t run out of money until the end. https://www.finiki.org/wiki/Variable_percentage_withdrawal

dunstonh

What I'm not clear on is whether SWR is supposed to mean:

There is no consistent meaning as it is an opinion.

- The amount I can safely take out and never run out of money, even if I became immortal. (i.e. it's basically just using the initial capital to generate an inflation linked income).
- The amount I can safely take out and most likely run out of money after a certain time e.g. 30 or 40 years?

if you were immortal, the rate would be lower.     If you are in your 50s, you would use 3%.  If you were in your 60s, then 3.5%, and so on.    

Assumptions will vary and can mean you erode capital or you may have assumptions that do not.  The draw rate will vary to meet your assumptions.