the "safe" 4% drawdown rule - flexible if receiving a DB pension also ?

Linton

Pat38493 said:

Linton said:

Apart from your calculation ignoring inflation:

If you aim for a 100% success rate on the very small amount of historical data available the SWR will be driven by the 2 cases where crashes and/or inflation linked drawdown  severely decrease the size of your pot in the early years of retirement and your pot fails to recover sufficiently before being hit by the next crash and so you run out of money.  This is known as Sequence of Returns (SOR) risk.

You need sufficient spare savings to live through the worst SOR situation or some strategy whereby you can avoid drawing down too much from your pension pot when SOR threatens your future.  There is much discussion what is the best such strategy.

OK but in a previous post, you made the same point, but it seemed to imply that using historical scenarios and then an SWR results in you saving up too much money because 99% of the time you will end up as the richest person in the graveyard, or maybe I misunderstood your previous point?

This is something I also thought about quite a bit and other than having a large cash float, there isn't much obvious you can do about it as you won't know whether you are in a 1920s or late 60s scenario until after you are already retired.

This raises another issue which is the danger of running historical scenarios too often - imagine you ran your historical scenario today and it shows 100% success, so you flip the finger to your boss and exit stage left. 

The following week, there is a big crash of 30% on the markets.  

You re-run your historical simulation and it says your success is now 70%.

Should you
a) Panic, call your boss, beg forgiveness and try to go back to work.
b) Open a beer on the reflection that at least one of the historical scenarios you modelled the prior week included an early 30% crash and worse - therefore you are now inside your own scenario that showed you are perfectly fine.

The historical models like cfiresim and so on, don't have any concept of where we are in the long term market cycle, and the historical data seems to show that the stock market is not random, but very unpredictable in the short term - it however responds to real world events in a somewhat predictable way, in that you can say pretty confidently that if news x is announced as a surprise, markets will go down.  You have no way of knowing how much or for how long, but it's not truly random.

Further, markets seem to turn in cycles that lasts a decade to 15 years or so - if there has recently been a 40% crash in the markets, it's very unlikely there will be another 40% crash next week.  However these historical simulations don't take this into account.

The only approach I've seen that attempts to correct for this in advance is to use CAPE or some kind of adjusted CAPE figure as a variable in your withdrawal strategy.  (CAPE as I understand it, is an attempt to assess whether the overall market is currently under or over valued based on the combined long term earnings of all the companies in the relevant market for any posters not aware).

Interestingly, this approach also attempted to compensate for the issue you raised that when you use cfiresim or many others, if you model a 40 year retirement, the last cohort that you have results for will be 1993, so you will not see any effects of the 2000 dot com bubble, or the 2008 financial crisis.  This was also attempted to be corrected by including these scenarios and using monte carlo approach for future periods not yet known in the same model.

Lots of different point, I will only focus on two....

1) Running ongoing historical cycles

Yes I agree completely with what you are saying about repeated running of cfiresim which ties in to what I see as a fundamental issue with SWR as calculated by simulations with historical data.  Such simulations model your finances starting in a wide range of stages of the economic cycle.  You may use this for initial planning but once you have retired the only scenarios that matter are those that start as close as possible to the then current situation.  If say 5 years after you start retirement there is a crash which leaves you with £X in your pot there is no point in using scenarios where you have £X in your pot at the peak of a boom.

So that leaves the rational response to a crash as your option (b).

2) Predicting the future

You can start off with the assumptions that:
a - in the long term, say 12-15 years+, equity will more than outperform inflation.  If that is not the case we are all doomed anyway.
b - whatever is going to happen in the meantime to equity is unknown and unknowable.  It  is futile to even try. Which rules out metrics like CAPE.

This implies that your portfolio needs to be divided into two parts.  One at 100% equity which you leave to do its job of long term growth against inflation..  What happens to it in less than 12-15 years is irrelevent and should not worry you..  The other part's role is to ensure that you can achieve your required standard of living in the meantime despite possibly high equity volatility.  The % equity is of necessity relatively low.  So I am talking about cash for the short term and cautious investments to meet medium term liabilities both sized to support income increasing at an assumed level of inflation over the first 12-15 years

SouthCoastBoy

My strategy is to keep cash for short term (< 5 years) and will top up when I perceive equities are high relative to my starting position. I'm starting out with about 9 or 10 years cash. 

DT2001

SouthCoastBoy said:

My strategy is to keep cash for short term (< 5 years) and will top up when I perceive equities are high relative to my starting position. I'm starting out with about 9 or 10 years cash. 

My first thought is, how do you counter inflation as over this year (before any interest) your 10 years of cash is now worth close to 9?

What % is your cash to non cash and what % of non cash is in equities?

Have you looked at a fixed term annuity?

Is one of the reasons you are holding so much cash because of a higher spend early in retirement or bridging the gap?

SouthCoastBoy

I'm getting about 4% so appreciate there an inflation hit, however all factored into the spreadsheet so quite comfortable with that. I'm not sure equities have performed much better over the last 12 months, so either way I would have lost money in real terms.

Split is 60:40 equities:cash

My planned spend is a lot more in the first 10 to 15 years of retirement than aged 75 plus

billy2shots

I always find discussion on SWR interesting. 

Person A could have a successful SWR of 4% if taken today. 

Next week Person A might be retiring after a week where the markets drop 30-40% and now their 4% swr will see them run out of money in 20 years time. 

My point. 

Recent(ish) market conditions at time of retiring have to play a part. 

Pre COVID we had been on a massive Bull run so for me personally, my SWR would be at the more conservative range. 2.75% possibly, thinking a correction isn't far away. 

Alternatively, if the markets had shat the bed in the proceeding 12 months and were 30-40% down, I might think a swr of 4% from this point on (presuming 4% would still meet my financial needs) would be more comfortable for me. Possibly an even higher %. 

Sure the markets could have another leg down but the upside is far more likely (over the shorter time period) than the 10 year bull market has of still charging on. 

In short, I'm surprised people can even talk about their SWR years out from retirement. 

JohnWinder

This interactive page gives lots of ‘big picture’ views, under different investing and timeline conditions: https://engaging-data.com/visualizing-4-rule/

Mick70

eastcorkram said:

Not really relevant to the thread I know, but I'm amazed how anyone somehow ends up already in receipt of a DB pension paying £29k a year at the age of 53 

I was forced out of my final salary scheme , however had protected rights and this was triggered from age 50 with no penalties from age 50 onwards.  I did want to sell my DB pension and received a great CETV however it fell through as the advisor would not sign it off.,
I aim to retire at 57 if can.  and although my lump sum was kept at arms length . I have been paying as much into my dc pot as possible.  I am hoping come retirement I will have my DB pension and myself and wife will have combined DC/Savings of £600k. Come state pension age we wont need as much of our DC/Savings

Audaxer

Mick70 said:

eastcorkram said:

Not really relevant to the thread I know, but I'm amazed how anyone somehow ends up already in receipt of a DB pension paying £29k a year at the age of 53 

I was forced out of my final salary scheme , however had protected rights and this was triggered from age 50 with no penalties from age 50 onwards.  I did want to sell my DB pension and received a great CETV however it fell through as the advisor would not sign it off.,
I aim to retire at 57 if can.  and although my lump sum was kept at arms length . I have been paying as much into my dc pot as possible.  I am hoping come retirement I will have my DB pension and myself and wife will have combined DC/Savings of £600k. Come state pension age we wont need as much of our DC/Savings

As you won't need much DC after SP age I think you are in a very good position. As you are going to add £200k to your DC pot over the next 4 years, with tax relief that amount will be up to £240k. Could that amount if kept in cash or relatively safe assets in your DC pension, fund most of your retirement income from 57 to 67 if taken along with your DB pension? If so, the existing £400k in your pension pots could be left to grow possibly untouched from now until 67, but if and when you needed to, you could draw some additional income from it.