SWR Question

Pat38493

michaels said:

Pat38493 said:

michaels said:

Deleted_User said:

michaels said:

Deleted_User said:

michaels said:

Pat38493 said:

michaels said:

I find this tool useful as you can put in all sorts of other cashflows, lump sums etc and it tells you what your SWR (100%, 99%, 95% etc no failures) and annual DC withdrawals for a length of time you choose (I tend to use to age 95) would have been given your chosen asset split over the last 120 odd years.

An Updated Google Sheet DIY Withdrawal Rate Toolbox (SWR Series Part 28) – Early Retirement Now

I was looking at this sheet this evening.  On the first sheet what is the meaning of the sections called “safe cons amounts conditional on S&P 500 drawdown”, with various columns for different % levels.  Is this relating somehow to the market performance during the start year or suchlike?

I think it is suggesting that if you start your drawdown during a period when the S&P has fallen back from its peak level then historically you would have been able to withdraw slightly more  (logically it sounds reasonable and helps with the situation where if you retire in a year when markets are high your big pot gives a high annual amount at a given SWR whereas if you retire a year later when markets are say down 20% then your safe withdrawal amount based on a percentage alone is also 20% smaller - ie if markets are not as 'high' then they are likely to perform 'better' going forward - of course it contradicts efficient market theory)

The problem is that “peaks” or only ever identifiable after falls. One could be waiting for a 20% drawdown for 10 years. 

Looking at the last 12 months, 12 months ago the S&P was at an all time max so on the table you could only choose the lowest SWR rate.  12 months later it is down 20% so in theory you could be safe with the slightly higher SWR rate.  This higher rate goes some way to make up for the fact that your pot is now 20% (depending on asset mix) smaller than it was 12 months ago so your actual SW currency amount does not reduce by as much as a strict SWR rule would imply.

It is not about waiting for a period of market retenchment so you can risk a higher withdrawal rate but more suggesting that if the market has fallen the SWR is higher but this will not go as far as meaning the swr amount does not decline when markets fall.

Of course this is all about the 'traditional' definition of SWR - the highest (fixed, inflation adjusted) withdrawal rate that would not have resulted in an unacceptable number of failure scenarios based on historic actuals.

End of Dec 2020 S&P500 traded at an all time high around 3800.  Today its trading around 4000, way off highs of about 4800 reached in December 2021.  Based on your approach a 60 year old starting retirement today can safely withdraw a lot more for life than his counterpart 2 years ago. Right? 

As mentioned, it is not my approach but yes based on the historic data record.  Of course we all know that this is very limited in terms of whether it represents enough distinct periods to be statistically useful.

Hold the front page - this spreadsheet from michaels is the first one of these type of tools I've used which actually seems to show better results if I take my DB later, which as we've discussed is the usual recommendation.  

It also though seems to offer a more pessimistic SWL than a couple of others like for example Timeline, which is again contrary to what has been discussed here before - it was posited that US centric tools would give results that are too optimistic but actually I see worse results with US centric models like cfiresim and the above, than with Timeline which is a UK tool (at least for my proposed scenarios that I am putting in).

It also models periods forward using the assumptions for average returns in future and includes these to end scenarios that have started in the last 30 years in the analysis which means depending how you set these values on the front sheet the current period may well be the 'worse case' one that gives the SWR

I think I found a problem with the spreadsheet model of this ERN guy and I will post it here before writing to him for clarification.

I don't know how his advanced computing models work behind the scenes that he blogs about, but his spreadsheet works by targeting a final portfolio balance at the end of retirement (which can be zero if you like), and then working backwards from there.

The problem comes if you program supplemental cash flows like DB pensions or State pension (social security in the US I guess).  In the sheet you can enter these flows by month through your retirement period.

However, my testing seems to show that he is shortcutting the representation of this by calculating the PV of those flows, and applying it to the initial portfolio.

This might work ok if the supplemental flows only represent a small portion of the overall retirement plan, but if they represent a big portion, it won't work.

You can see this if you put some fake edge cases into his sheet - try putting in that you are retiring 10 years before your DB pension - DB pension income 25K or whatever.  Then put in that your portfolio is almost non existent like $10.

You will find that his spreadsheet suggest that in the first 10 years you can withdraw thousands of dollars (which you don't have because you only have $10).

Am I missing something here?  My theory at the moment is that the methodology he is using in his spreadsheet is not applicable to mixed scenarios with guaranteed income flows unless those flows start on month 1, because he is using the PV of those flows from day 1 without respect to their real timing.

gm0

There does seem to be some backtesting statistical support for the notion that when markets are highly priced (CAPE high) the demonstrably safe (for given parameters and data set) % WR (of the larger amount) should be tilted down. And conversely when markets have passed the long term trend line on the way down and overshot negatively on sentiment vs a notional fair value (in this context based on long term historic returns trend line) that a higher % of that smaller pot would be possible in anticipation of improved returns from the low base. This is one example of a "tilts" concept. 

This is potentially useful as it uses two data points you have. Start date.  CAPE now.  To help make a choice of initial %WR which you need to make in a lot of methods - to start your retirement sequence of returns and draw mix of these and capital.  Or you can ignore tilts entirely and pick a risk level or a low sub MSWR % and get on with it.   Where the balance of pot size and desired income is finely balanced (i.e. pot on the lower bound of big enough) then obviously this issue about sweating sub % details becomes more significant

I read around this subject fairly extensively on my planning journey- academic papers, ERN, several goes through McClung.  In the end I concluded that

a) some drawdown access and extraction methods are demonstrably *slightly* worse than others on a range of historic and simulated markets US and other and can be avoided on that basis. 

It is not proved that they will definitively be worse in the future.  But such evidence as does exist says A < B.  A being still not a terrible decision but since better are available.   Implication choose B.  Data beats abstract web advocacy all day long.

b) from those methods that remain after such filtering there are choices (for tested conditions) that  "work historically" or under monte-carlo or other stress market simulation without "surprises" introduced by the technique itself.  This again is helpful to sleeping easier with any given approach.

And *nobody* knows which will be "best" statistically for the specific 40 years from 2023 - 2063 for a given portfolio shape

c) A lot of this technical methods exploration is fishing for risk management gains (same income, slightly lower risk of retirement failure) or WR gains at the ~0.25% level.  Which compared to other drag factors - principally investment and fund management costs and FX is small potatoes.  Yet if an approximate target WR is ~3.5%.  0.25% is a decent proportion of the total.  0.5% would be a major win.  So perhaps worth exploring afer all.

Only after investing costs and FX factors and drag have been evaluated.  Competent tool supported IFA advice.
Or the frankly very low price of entry for the McClung book.  Whether you end up agreeing with and selecting his chosen approach or not there is confidence building value in the testing and test results presented around a range of other choices you could make.

I have found the ERN drawdown blog useful to get educated and for debunking a long list of plausible sounding things by demonstrating that they don't work in a historic series (or make little practical difference).  This is helpful. Things that demonstrably already *haven't worked* is good guidance information.  Big Six is a worse bet than Line and full odds on the craps table (due to extra drag from house edge over probability).   Similarly I could pick an arbitrary 5% WR and it "might" work - for given investments and start date.  On a range of paths it could.  Anecdotally.  And on another set of investments and start dates - depletion during the journey past working age beckons.

Occasionally a small demonstrable statistical gain is on offer if you can be bothered with the method complexity. And if you believe (this requires faith without proof - that the future will sufficiently resemble the past that squeezing the balloon into that particular shape will *again* be more optimised). 

Useful - provided you always check ERN assumptions are similar enough to those of interest to you - duration, market used, other method parameters etc.  Remembering that any evidential value/mathematical validity of what he is saying is quite strictly limited to that exact scenario as tested.  Look at what he says about Guyton-Klinger and then at what advocates of that say - and compare.  Both of these things (specific tests and analysis) can be "true" at the same time.  For the tests as run and assumptions as given.  I don't especially rate ERN's test of GK as a proper test of what they proposed.  It is GKish with shortcuts. 
The argument thus becomes about assumptions, implementation and parameters.  Which is itself a neat illustration that you can't stretch evidence much or change methods and parameters to taste without finding or running exactly equivalent tests if that validation is important to you.

Where other commentators often disagree around CAPE is around any predictive element.  Beyond the general past markets and backtesting don't predict the future.  The fact CAPE is high doesn't tell you *when* the "long term average line crossing event will come.  History suggests that it will come again as so often before.  Rough looking sinewave across along a term trend line.

There is a section on tilts and CAPE as example tilt in McClung (Living off your Money).  As I recall he quite likes the idea and post testing cautiously offers it as an optional extra tuning approach.

Pat38493

NedS said:

Pat38493 said:

Also - if you wanted to apply such a strategy to the UK, would you have to calculate CAPE for the relevant mix of funds that you have?  These blogs seem to take the US S&P 500 as the driver for all this stuff?

When you say apply such a strategy to the UK, do you mean apply it to UK markets (FTSE All Share) or UK investors, who presumably hold a similar mix of investments to their American peers. I assume you mean the latter.

As a UK investor, if you are invested globally in a diversified portfolio, and you accept the premise that the US stock market drives global markets, and that the S&P500 (as the best proxy for US markets) represents 55-60% of your globally diversified portfolio, then using the S&P500 is not a bad representation of the risky portion of your portfolio, although you could argue that a global equity tracker (MSCI or FTSE) may be better, but may be less well researched in terms of ready availability of CAPE and other data needed to plug into your models. Put simply, the S&P500 is probably the most researched equity index available and although it may only represent around a half of your equity portfolio, it pretty much drives what happens in the other half too.

In may particular case my funds are currently still invested in the company defaults which have a fairly high proportion of US equities anyway.

[Deleted User]

CAPE theory works great for the periods before it was published. Unfortunately it stopped working after it was published. Shiller then published a modified version of CAPE. He’ll have to keep doing it to fit the past as time brings out new datasets. A common problem with people trying to predict market returns.

Pat38493

gm0 said:

There does seem to be some backtesting statistical support for the notion that when markets are highly priced (CAPE high) the demonstrably safe (for given parameters and data set) % WR (of the larger amount) should be tilted down. And conversely when markets have passed the long term trend line on the way down and overshot negatively on sentiment vs a notional fair value (in this context based on long term historic returns trend line) that a higher % of that smaller pot would be possible in anticipation of improved returns from the low base. This is one example of a "tilts" concept. 

This is potentially useful as it uses two data points you have. Start date.  CAPE now.  To help make a choice of initial %WR which you need to make in a lot of methods - to start your retirement sequence of returns and draw mix of these and capital.  Or you can ignore tilts entirely and pick a risk level or a low sub MSWR % and get on with it.   Where the balance of pot size and desired income is finely balanced (i.e. pot on the lower bound of big enough) then obviously this issue about sweating sub % details becomes more significant

I read around this subject fairly extensively on my planning journey- academic papers, ERN, several goes through McClung.  In the end I concluded that

a) some drawdown access and extraction methods are demonstrably *slightly* worse than others on a range of historic and simulated markets US and other and can be avoided on that basis. 

It is not proved that they will definitively be worse in the future.  But such evidence as does exist says A < B.  A being still not a terrible decision but since better are available.   Implication choose B.  Data beats abstract web advocacy all day long.

b) from those methods that remain after such filtering there are choices (for tested conditions) that  "work historically" or under monte-carlo or other stress market simulation without "surprises" introduced by the technique itself.  This again is helpful to sleeping easier with any given approach.

And *nobody* knows which will be "best" statistically for the specific 40 years from 2023 - 2063 for a given portfolio shape

c) A lot of this technical methods exploration is fishing for risk management gains (same income, slightly lower risk of retirement failure) or WR gains at the ~0.25% level.  Which compared to other drag factors - principally investment and fund management costs and FX is small potatoes.  Yet if an approximate target WR is ~3.5%.  0.25% is a decent proportion of the total.  0.5% would be a major win.  So perhaps worth exploring afer all.

Only after investing costs and FX factors and drag have been evaluated.  Competent tool supported IFA advice.
Or the frankly very low price of entry for the McClung book.  Whether you end up agreeing with and selecting his chosen approach or not there is confidence building value in the testing and test results presented around a range of other choices you could make.

I have found the ERN drawdown blog useful to get educated and for debunking a long list of plausible sounding things by demonstrating that they don't work in a historic series (or make little practical difference).  This is helpful. Things that demonstrably already *haven't worked* is good guidance information.  Big Six is a worse bet than Line and full odds on the craps table (due to extra drag from house edge over probability).   Similarly I could pick an arbitrary 5% WR and it "might" work - for given investments and start date.  On a range of paths it could.  Anecdotally.  And on another set of investments and start dates - depletion during the journey past working age beckons.

Occasionally a small demonstrable statistical gain is on offer if you can be bothered with the method complexity. And if you believe (this requires faith without proof - that the future will sufficiently resemble the past that squeezing the balloon into that particular shape will *again* be more optimised). 

Useful - provided you always check ERN assumptions are similar enough to those of interest to you - duration, market used, other method parameters etc.  Remembering that any evidential value/mathematical validity of what he is saying is quite strictly limited to that exact scenario as tested.  Look at what he says about Guyton-Klinger and then at what advocates of that say - and compare.  Both of these things (specific tests and analysis) can be "true" at the same time.  For the tests as run and assumptions as given.  I don't especially rate ERN's test of GK as a proper test of what they proposed.  It is GKish with shortcuts. 
The argument thus becomes about assumptions, implementation and parameters.  Which is itself a neat illustration that you can't stretch evidence much or change methods and parameters to taste without finding or running exactly equivalent tests if that validation is important to you.

Where other commentators often disagree around CAPE is around any predictive element.  Beyond the general past markets and backtesting don't predict the future.  The fact CAPE is high doesn't tell you *when* the "long term average line crossing event will come.  History suggests that it will come again as so often before.  Rough looking sinewave across along a term trend line.

There is a section on tilts and CAPE as example tilt in McClung (Living off your Money).  As I recall he quite likes the idea and post testing cautiously offers it as an optional extra tuning approach.

Thanks for your comments.

In the meantime I exchanged a few comments with ERN on the comments section of his blog.

He acknowledged that his spreadsheet model which I think is a short cut to some extent of what he does behind the scenes, can produce odd results if you put in certain inputs - for example if you say that you want to retire today with £1 in your pocket, on the basis that an eccentric deceased relative has bequeathed you x million pounds in 30 years from now, the sheet reports that you can already start spending this money.

More realistically - the sheet doesn't throw any kind of alarm if you are trying to bridge until a DB pension kicks in with very front heavy withdrawals - if you look at the bridging period discretely you will see failures but if you look at the whole sheet everything looks ok.  The comment was that you have to use common sense when using the sheet.  

Further, I suspect that he is somehow amalgamating the present value of future cash flows with the historical model, thereby treating is with the same cumulated growth pattern as your general portfolio which is not totally accurate as it should be only treated with inflation.

However the model seems to give results in the same ballpark as other tools as long as you are within the ball park that the creator envisaged.

My approach generally is to use several different tools and sheets and compare the results to see how close they are too each other and what is causing the differences - if all of them say that my plans are looking good, then I would feel pretty confident.

michaels

Pat38493 said:

gm0 said:

There does seem to be some backtesting statistical support for the notion that when markets are highly priced (CAPE high) the demonstrably safe (for given parameters and data set) % WR (of the larger amount) should be tilted down. And conversely when markets have passed the long term trend line on the way down and overshot negatively on sentiment vs a notional fair value (in this context based on long term historic returns trend line) that a higher % of that smaller pot would be possible in anticipation of improved returns from the low base. This is one example of a "tilts" concept. 

This is potentially useful as it uses two data points you have. Start date.  CAPE now.  To help make a choice of initial %WR which you need to make in a lot of methods - to start your retirement sequence of returns and draw mix of these and capital.  Or you can ignore tilts entirely and pick a risk level or a low sub MSWR % and get on with it.   Where the balance of pot size and desired income is finely balanced (i.e. pot on the lower bound of big enough) then obviously this issue about sweating sub % details becomes more significant

I read around this subject fairly extensively on my planning journey- academic papers, ERN, several goes through McClung.  In the end I concluded that

a) some drawdown access and extraction methods are demonstrably *slightly* worse than others on a range of historic and simulated markets US and other and can be avoided on that basis. 

It is not proved that they will definitively be worse in the future.  But such evidence as does exist says A < B.  A being still not a terrible decision but since better are available.   Implication choose B.  Data beats abstract web advocacy all day long.

b) from those methods that remain after such filtering there are choices (for tested conditions) that  "work historically" or under monte-carlo or other stress market simulation without "surprises" introduced by the technique itself.  This again is helpful to sleeping easier with any given approach.

And *nobody* knows which will be "best" statistically for the specific 40 years from 2023 - 2063 for a given portfolio shape

c) A lot of this technical methods exploration is fishing for risk management gains (same income, slightly lower risk of retirement failure) or WR gains at the ~0.25% level.  Which compared to other drag factors - principally investment and fund management costs and FX is small potatoes.  Yet if an approximate target WR is ~3.5%.  0.25% is a decent proportion of the total.  0.5% would be a major win.  So perhaps worth exploring afer all.

Only after investing costs and FX factors and drag have been evaluated.  Competent tool supported IFA advice.
Or the frankly very low price of entry for the McClung book.  Whether you end up agreeing with and selecting his chosen approach or not there is confidence building value in the testing and test results presented around a range of other choices you could make.

I have found the ERN drawdown blog useful to get educated and for debunking a long list of plausible sounding things by demonstrating that they don't work in a historic series (or make little practical difference).  This is helpful. Things that demonstrably already *haven't worked* is good guidance information.  Big Six is a worse bet than Line and full odds on the craps table (due to extra drag from house edge over probability).   Similarly I could pick an arbitrary 5% WR and it "might" work - for given investments and start date.  On a range of paths it could.  Anecdotally.  And on another set of investments and start dates - depletion during the journey past working age beckons.

Occasionally a small demonstrable statistical gain is on offer if you can be bothered with the method complexity. And if you believe (this requires faith without proof - that the future will sufficiently resemble the past that squeezing the balloon into that particular shape will *again* be more optimised). 

Useful - provided you always check ERN assumptions are similar enough to those of interest to you - duration, market used, other method parameters etc.  Remembering that any evidential value/mathematical validity of what he is saying is quite strictly limited to that exact scenario as tested.  Look at what he says about Guyton-Klinger and then at what advocates of that say - and compare.  Both of these things (specific tests and analysis) can be "true" at the same time.  For the tests as run and assumptions as given.  I don't especially rate ERN's test of GK as a proper test of what they proposed.  It is GKish with shortcuts. 
The argument thus becomes about assumptions, implementation and parameters.  Which is itself a neat illustration that you can't stretch evidence much or change methods and parameters to taste without finding or running exactly equivalent tests if that validation is important to you.

Where other commentators often disagree around CAPE is around any predictive element.  Beyond the general past markets and backtesting don't predict the future.  The fact CAPE is high doesn't tell you *when* the "long term average line crossing event will come.  History suggests that it will come again as so often before.  Rough looking sinewave across along a term trend line.

There is a section on tilts and CAPE as example tilt in McClung (Living off your Money).  As I recall he quite likes the idea and post testing cautiously offers it as an optional extra tuning approach.

Thanks for your comments.

In the meantime I exchanged a few comments with ERN on the comments section of his blog.

He acknowledged that his spreadsheet model which I think is a short cut to some extent of what he does behind the scenes, can produce odd results if you put in certain inputs - for example if you say that you want to retire today with £1 in your pocket, on the basis that an eccentric deceased relative has bequeathed you x million pounds in 30 years from now, the sheet reports that you can already start spending this money.

More realistically - the sheet doesn't throw any kind of alarm if you are trying to bridge until a DB pension kicks in with very front heavy withdrawals - if you look at the bridging period discretely you will see failures but if you look at the whole sheet everything looks ok.  The comment was that you have to use common sense when using the sheet.  

Further, I suspect that he is somehow amalgamating the present value of future cash flows with the historical model, thereby treating is with the same cumulated growth pattern as your general portfolio which is not totally accurate as it should be only treated with inflation.

However the model seems to give results in the same ballpark as other tools as long as you are within the ball park that the creator envisaged.

My approach generally is to use several different tools and sheets and compare the results to see how close they are too each other and what is causing the differences - if all of them say that my plans are looking good, then I would feel pretty confident.

Really useful.

NPVing future index linked cashflows then assuming the value increases going forward with growth of the portfolio rather than inflation sounds like a big overstatement - eg that index linked state pension payment of £800pm (in current pounds) in 40 years time might be treated as £3800 (in current terms) if it is assumed to grow by 4% pa in real terms....

Pat38493

michaels said:

Pat38493 said:

gm0 said:

There does seem to be some backtesting statistical support for the notion that when markets are highly priced (CAPE high) the demonstrably safe (for given parameters and data set) % WR (of the larger amount) should be tilted down. And conversely when markets have passed the long term trend line on the way down and overshot negatively on sentiment vs a notional fair value (in this context based on long term historic returns trend line) that a higher % of that smaller pot would be possible in anticipation of improved returns from the low base. This is one example of a "tilts" concept. 

This is potentially useful as it uses two data points you have. Start date.  CAPE now.  To help make a choice of initial %WR which you need to make in a lot of methods - to start your retirement sequence of returns and draw mix of these and capital.  Or you can ignore tilts entirely and pick a risk level or a low sub MSWR % and get on with it.   Where the balance of pot size and desired income is finely balanced (i.e. pot on the lower bound of big enough) then obviously this issue about sweating sub % details becomes more significant

I read around this subject fairly extensively on my planning journey- academic papers, ERN, several goes through McClung.  In the end I concluded that

a) some drawdown access and extraction methods are demonstrably *slightly* worse than others on a range of historic and simulated markets US and other and can be avoided on that basis. 

It is not proved that they will definitively be worse in the future.  But such evidence as does exist says A < B.  A being still not a terrible decision but since better are available.   Implication choose B.  Data beats abstract web advocacy all day long.

b) from those methods that remain after such filtering there are choices (for tested conditions) that  "work historically" or under monte-carlo or other stress market simulation without "surprises" introduced by the technique itself.  This again is helpful to sleeping easier with any given approach.

And *nobody* knows which will be "best" statistically for the specific 40 years from 2023 - 2063 for a given portfolio shape

c) A lot of this technical methods exploration is fishing for risk management gains (same income, slightly lower risk of retirement failure) or WR gains at the ~0.25% level.  Which compared to other drag factors - principally investment and fund management costs and FX is small potatoes.  Yet if an approximate target WR is ~3.5%.  0.25% is a decent proportion of the total.  0.5% would be a major win.  So perhaps worth exploring afer all.

Only after investing costs and FX factors and drag have been evaluated.  Competent tool supported IFA advice.
Or the frankly very low price of entry for the McClung book.  Whether you end up agreeing with and selecting his chosen approach or not there is confidence building value in the testing and test results presented around a range of other choices you could make.

I have found the ERN drawdown blog useful to get educated and for debunking a long list of plausible sounding things by demonstrating that they don't work in a historic series (or make little practical difference).  This is helpful. Things that demonstrably already *haven't worked* is good guidance information.  Big Six is a worse bet than Line and full odds on the craps table (due to extra drag from house edge over probability).   Similarly I could pick an arbitrary 5% WR and it "might" work - for given investments and start date.  On a range of paths it could.  Anecdotally.  And on another set of investments and start dates - depletion during the journey past working age beckons.

Occasionally a small demonstrable statistical gain is on offer if you can be bothered with the method complexity. And if you believe (this requires faith without proof - that the future will sufficiently resemble the past that squeezing the balloon into that particular shape will *again* be more optimised). 

Useful - provided you always check ERN assumptions are similar enough to those of interest to you - duration, market used, other method parameters etc.  Remembering that any evidential value/mathematical validity of what he is saying is quite strictly limited to that exact scenario as tested.  Look at what he says about Guyton-Klinger and then at what advocates of that say - and compare.  Both of these things (specific tests and analysis) can be "true" at the same time.  For the tests as run and assumptions as given.  I don't especially rate ERN's test of GK as a proper test of what they proposed.  It is GKish with shortcuts. 
The argument thus becomes about assumptions, implementation and parameters.  Which is itself a neat illustration that you can't stretch evidence much or change methods and parameters to taste without finding or running exactly equivalent tests if that validation is important to you.

Where other commentators often disagree around CAPE is around any predictive element.  Beyond the general past markets and backtesting don't predict the future.  The fact CAPE is high doesn't tell you *when* the "long term average line crossing event will come.  History suggests that it will come again as so often before.  Rough looking sinewave across along a term trend line.

There is a section on tilts and CAPE as example tilt in McClung (Living off your Money).  As I recall he quite likes the idea and post testing cautiously offers it as an optional extra tuning approach.

Thanks for your comments.

In the meantime I exchanged a few comments with ERN on the comments section of his blog.

He acknowledged that his spreadsheet model which I think is a short cut to some extent of what he does behind the scenes, can produce odd results if you put in certain inputs - for example if you say that you want to retire today with £1 in your pocket, on the basis that an eccentric deceased relative has bequeathed you x million pounds in 30 years from now, the sheet reports that you can already start spending this money.

More realistically - the sheet doesn't throw any kind of alarm if you are trying to bridge until a DB pension kicks in with very front heavy withdrawals - if you look at the bridging period discretely you will see failures but if you look at the whole sheet everything looks ok.  The comment was that you have to use common sense when using the sheet.  

Further, I suspect that he is somehow amalgamating the present value of future cash flows with the historical model, thereby treating is with the same cumulated growth pattern as your general portfolio which is not totally accurate as it should be only treated with inflation.

However the model seems to give results in the same ballpark as other tools as long as you are within the ball park that the creator envisaged.

My approach generally is to use several different tools and sheets and compare the results to see how close they are too each other and what is causing the differences - if all of them say that my plans are looking good, then I would feel pretty confident.

Really useful.

NPVing future index linked cashflows then assuming the value increases going forward with growth of the portfolio rather than inflation sounds like a big overstatement - eg that index linked state pension payment of £800pm (in current pounds) in 40 years time might be treated as £3800 (in current terms) if it is assumed to grow by 4% pa in real terms....

With the sheet where he gives the CAPE based estimate of your potential withdrawals, this is definitely what he is doing as it's pretty obvious he is simply adding the NPV of the future flows to the portfolio.

On the normal cash flow sheet, the formulas are a lot more complicated than that and he hasn't specifically replied that yes he is effectively not only inflating those flows by inflation, but actually applying the portfolio mix to them.  It's quite hard to trace what's going on on these kind of horrendously complicated spreadsheets but my impression is that the blanket adjustment he is making goes back into the general soup of the historical growth model.

That said, the end results that his sheet give, actually gives me somewhat lower zero failure available spending than some of the other tools I've tried, which seems a bit strange because as you say, the issues above will actually more likely make it over optimistic.

Probably when you are talking about bridging periods of 8-10 years in a 40 year period, the effect of it is not that large in the grand scheme of things so it doesn't impact the results significantly.

One of the other big counterintuitive points that I got from some of this is that historically, although one might think that it's a good idea to retire when your fund looks high and markets are very good, this is actually historically a bad time to retire - you actually did better if you retire near the bottom of the market.  A lot of these tools that calculate success rate against x hundred history scenarios won't cater for that because obviously they don't know where we are in the market cycle - I guess some of the other stats that ERN provides would be somehow helpful there because you can at least get some idea or feel for where you are in the market cycle give or take a year.

Malthusian

Pat38493 said:

One of the other big counterintuitive points that I got from some of this is that historically, although one might think that it's a good idea to retire when your fund looks high and markets are very good, this is actually historically a bad time to retire - you actually did better if you retire near the bottom of the market. 

Is that on the basis that if you retire near the bottom of the market your initial withdrawals of 4% (or whatever) of the present value will be a lot lower than someone retiring near the top of the market? Which is then compounded by the fact that the person retiring at the bottom of the market might then see their portfolio jump by say 20% (at which point their withdrawals become an even safer 3.33%pa) while someone retiring at the top of the market will inevitably encounter the opposite at some point?
It's certainly an interesting illustration of the limitations of "safe withdrawal rate" models work, but not really a fair comparison.
You wouldn't tell someone to take a high level of withdrawals at the bottom of the market on the basis that their pension is bound to jump in value at some point. Partly because there's no guarantee as to when or even if it'll go up again, and partly because who wants to spend their pension fund when there's no tomorrow when everyone says the sky is falling in and the global economy will be in recession for a decade? (Because that is how people feel when the market is actually at the bottom.) 
There is also the aspect of "pound cost ravaging" to be consider, although starting pension withdrawals at the bottom of the market doesn't necessarily involve pound cost ravaging if you have a cash buffer to draw on.

DT2001

Malthusian said:

Pat38493 said:

One of the other big counterintuitive points that I got from some of this is that historically, although one might think that it's a good idea to retire when your fund looks high and markets are very good, this is actually historically a bad time to retire - you actually did better if you retire near the bottom of the market. 

Is that on the basis that if you retire near the bottom of the market your initial withdrawals of 4% (or whatever) of the present value will be a lot lower than someone retiring near the top of the market? Which is then compounded by the fact that the person retiring at the bottom of the market might then see their portfolio jump by say 20% (at which point their withdrawals become an even safer 3.33%pa) while someone retiring at the top of the market will inevitably encounter the opposite at some point?
It's certainly an interesting illustration of the limitations of "safe withdrawal rate" models work, but not really a fair comparison.
You wouldn't tell someone to take a high level of withdrawals at the bottom of the market on the basis that their pension is bound to jump in value at some point. Partly because there's no guarantee as to when or even if it'll go up again, and partly because who wants to spend their pension fund when there's no tomorrow when everyone says the sky is falling in and the global economy will be in recession for a decade? (Because that is how people feel when the market is actually at the bottom.) 
There is also the aspect of "pound cost ravaging" to be consider, although starting pension withdrawals at the bottom of the market doesn't necessarily involve pound cost ravaging if you have a cash buffer to draw on.

You only know the top or bottom of the market with hindsight. If you are aiming for a number combined with a perceived SWR if you ‘hit’ the bottom you will be better off (but maybe only in terms of the legacy you leave) however presumably you will have worked longer as investments have not performed as well?
The key is being adaptable - how much are you willing/able to vary your spending, downsize, work part time etc.

Pat38493

DT2001 said:

Malthusian said:

Pat38493 said:

One of the other big counterintuitive points that I got from some of this is that historically, although one might think that it's a good idea to retire when your fund looks high and markets are very good, this is actually historically a bad time to retire - you actually did better if you retire near the bottom of the market. 

Is that on the basis that if you retire near the bottom of the market your initial withdrawals of 4% (or whatever) of the present value will be a lot lower than someone retiring near the top of the market? Which is then compounded by the fact that the person retiring at the bottom of the market might then see their portfolio jump by say 20% (at which point their withdrawals become an even safer 3.33%pa) while someone retiring at the top of the market will inevitably encounter the opposite at some point?
It's certainly an interesting illustration of the limitations of "safe withdrawal rate" models work, but not really a fair comparison.
You wouldn't tell someone to take a high level of withdrawals at the bottom of the market on the basis that their pension is bound to jump in value at some point. Partly because there's no guarantee as to when or even if it'll go up again, and partly because who wants to spend their pension fund when there's no tomorrow when everyone says the sky is falling in and the global economy will be in recession for a decade? (Because that is how people feel when the market is actually at the bottom.) 
There is also the aspect of "pound cost ravaging" to be consider, although starting pension withdrawals at the bottom of the market doesn't necessarily involve pound cost ravaging if you have a cash buffer to draw on.

You only know the top or bottom of the market with hindsight. If you are aiming for a number combined with a perceived SWR if you ‘hit’ the bottom you will be better off (but maybe only in terms of the legacy you leave) however presumably you will have worked longer as investments have not performed as well?
The key is being adaptable - how much are you willing/able to vary your spending, downsize, work part time etc.

True but you can at least get some hints if you are looking at the whole market - for example if the markets went down 20% this year, I know per definition that we are not at the all time peak.  Also looking at things like CAPE as mentioned above are not going to be perfect or totally reliable but they can at least give you some indication of whether the markets seem to be overvalued or undervalued compared to earnings trends or suchlike.  

But as you say it's probably a bit theoretical because it's unlikely someone would decide - it looks like it's a the bottom of the market so I'm going to retire now even though I was planning to work for another 2 years and carry on paying in for that time.