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4% Drawdown If Preservation Of The Capital Is Not A Concern ?
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As @Linton says, the 'safe' refers to historically safe and is different for different countries and different asset allocations (not only different ratios of stocks and bonds, but the maturity of bonds) - it is not a physical law!
The maximum inflation adjusted withdrawal rates that avoided running out of money before the end of the planning period for 60% UK stocks and 40% UK bonds (longish maturity) are given in the following graph (UK returns and UK inflation from macrohistory.net, my own calculations). SAFEMAX was about 2.9%.
There were two problem periods:
1) Early 20th century (high inflation in WWI)
2) 1937 (stock market crash, WWII, and post-war currency and debt problems)
The relatively low SWR that the US simulators give in the mid-1960s were not present in the UK.
It is probably unlikely that anyone would invest solely in UK stocks nowadays, so here is the same graph with an allocation of 30% UK stocks, 30% US stocks, and 40% UK bonds (at some stage I'll get around to calculating a cap-weighted international index from the mactohistory.net dataset). The SAFEMAX was 3.3% for this allocation
The worst cases remained centred around the same periods as before, but the SWR was now a little higher. However, not all retirements were improved by holding US stocks - e.g., the dip in the late 1960s is worse with US stocks than without.
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Linton said:One warning…
Do not take the word “Safe” in SWR too seriously. The calculations are based on a single set of data. Current calculated values such as a 95% success rate are based on what happened during 2 relatively short historic periods, a few years during the Great Crash and the other in the early 1970s when low market returns coincided with high inflation. If 1 or 3 such events had taken place in the past 100 years or the two had taken place much less than 40 years apart the SWRs would be rather different.
It would be interesting to see an SWR simulation that started just before 2001 but sadly it is too early for that.
In real terms, the portfolio has fallen to just under 40% of the original value and must now last another 8 years or so (assuming a 30 year planning period) which may (or may not) be successful. Alternatively, assuming they were 65 in 2000, an RPI annuity could now be bought with a payout rate of 9.5% (single life, 10 year guarantee, quote from moneyhelper assuming no health problems), 17.1% (single life, no guarantee) or 12.9% (joint life, no guarantee). With the former an income of 3.8% (of the original portfolio) could be purchased (leaving nothing in the portfolio) while in the second case, an inflation protected income of 4% could be purchased with about 60% of the remaining portfolio leaving some legacy, while with the joint annuity 4% income could be purchased with just under 80% of the remaining portfolio.
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OldScientist said:Linton said:One warning…
Do not take the word “Safe” in SWR too seriously. The calculations are based on a single set of data. Current calculated values such as a 95% success rate are based on what happened during 2 relatively short historic periods, a few years during the Great Crash and the other in the early 1970s when low market returns coincided with high inflation. If 1 or 3 such events had taken place in the past 100 years or the two had taken place much less than 40 years apart the SWRs would be rather different.
It would be interesting to see an SWR simulation that started just before 2001 but sadly it is too early for that.
In real terms, the portfolio has fallen to just under 40% of the original value and must now last another 8 years or so (assuming a 30 year planning period) which may (or may not) be successful. Alternatively, assuming they were 65 in 2000, an RPI annuity could now be bought with a payout rate of 9.5% (single life, 10 year guarantee, quote from moneyhelper assuming no health problems), 17.1% (single life, no guarantee) or 12.9% (joint life, no guarantee). With the former an income of 3.8% (of the original portfolio) could be purchased (leaving nothing in the portfolio) while in the second case, an inflation protected income of 4% could be purchased with about 60% of the remaining portfolio leaving some legacy, while with the joint annuity 4% income could be purchased with just under 80% of the remaining portfolio.1 -
GazzaBloom said:OldScientist said:Linton said:One warning…
Do not take the word “Safe” in SWR too seriously. The calculations are based on a single set of data. Current calculated values such as a 95% success rate are based on what happened during 2 relatively short historic periods, a few years during the Great Crash and the other in the early 1970s when low market returns coincided with high inflation. If 1 or 3 such events had taken place in the past 100 years or the two had taken place much less than 40 years apart the SWRs would be rather different.
It would be interesting to see an SWR simulation that started just before 2001 but sadly it is too early for that.
In real terms, the portfolio has fallen to just under 40% of the original value and must now last another 8 years or so (assuming a 30 year planning period) which may (or may not) be successful. Alternatively, assuming they were 65 in 2000, an RPI annuity could now be bought with a payout rate of 9.5% (single life, 10 year guarantee, quote from moneyhelper assuming no health problems), 17.1% (single life, no guarantee) or 12.9% (joint life, no guarantee). With the former an income of 3.8% (of the original portfolio) could be purchased (leaving nothing in the portfolio) while in the second case, an inflation protected income of 4% could be purchased with about 60% of the remaining portfolio leaving some legacy, while with the joint annuity 4% income could be purchased with just under 80% of the remaining portfolio.
The situation of a Sequence Of Returns before the start of modelling is a general problem with using SWRs...
One can as @jamesd suggests repeat the SWR calcuolation every few years. But as pointed out..
SWR takes no recognition of the state of the market at the time. So if you determine the SWR after 5 years of rising prices you will get the same answer as soon after a large crash. In the first case a recalculated SWR could well be be dangerously optimistic and in the second case it will be unnecessarily pessimistic even if the SWR itself was accurate.
Personally I believe for this and a list of other reasons there are more effective ways of handling market volatility during retirement and that the use of SWR is best restricted to a final sanity check of one's plans developed on different principles.
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Hi QB, thanks for your thoughts. No, not quite. Looking for around 50k gross to stay below the 50270 upper earnings limit. So I have 24k index linked at 58. The 26k from the DC will only need to be at that level until 67 when it can then drop to 16k or so because the SP will then take up £10k. Of course, all this is in today's numbers. and as you allude to, this is all very subject to growth and inflation and that some years the withdrawals will need to be less if the market is down. I might make up some of that 26k from ISA's as well. Like someone else said, pensions were static for almost two years with no real growth - and even loss in many cases. Since October they have come shooting back,.
Many thanks for the links to the tool. I shall investigate that.
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MetaPhysical said:Hi QB, thanks for your thoughts. No, not quite. Looking for around 50k gross to stay below the 50270 upper earnings limit. So I have 24k index linked at 58. The 26k from the DC will only need to be at that level until 67 when it can then drop to 16k or so because the SP will then take up £10k. Of course, all this is in today's numbers. and as you allude to, this is all very subject to growth and inflation and that some years the withdrawals will need to be less if the market is down. I might make up some of that 26k from ISA's as well. Like someone else said, pensions were static for almost two years with no real growth - and even loss in many cases. Since October they have come shooting back,.
Many thanks for the links to the tool. I shall investigate that.I think....1 -
OldScientist said:As @Linton says, the 'safe' refers to historically safe and is different for different countries and different asset allocations (not only different ratios of stocks and bonds, but the maturity of bonds) - it is not a physical law!
The maximum inflation adjusted withdrawal rates that avoided running out of money before the end of the planning period for 60% UK stocks and 40% UK bonds (longish maturity) are given in the following graph (UK returns and UK inflation from macrohistory.net, my own calculations). SAFEMAX was about 2.9%.
There were two problem periods:
1) Early 20th century (high inflation in WWI)
2) 1937 (stock market crash, WWII, and post-war currency and debt problems)
The relatively low SWR that the US simulators give in the mid-1960s were not present in the UK.
It is probably unlikely that anyone would invest solely in UK stocks nowadays, so here is the same graph with an allocation of 30% UK stocks, 30% US stocks, and 40% UK bonds (at some stage I'll get around to calculating a cap-weighted international index from the mactohistory.net dataset). The SAFEMAX was 3.3% for this allocation
The worst cases remained centred around the same periods as before, but the SWR was now a little higher. However, not all retirements were improved by holding US stocks - e.g., the dip in the late 1960s is worse with US stocks than without.1 -
Linton said:
It would be interesting to see an SWR simulation that started just before 2001 but sadly it is too early for that.You can model for a 24 year timespan though - but instead of running your pot down to (near) depletion, just model it to run your pot down to a minimum of 6/30ths of the starting amount (for a 30yr retirement), adjusted for inflation over the 24 yrs.0 -
michaels said:For the bridge period consider an index linked bond ladder to remove inflation and volatility risk.0
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The only single product I know of would be a fixed term annuity.........an SP bridge bond ladder is a mixture of individual bonds of various maturity dates, designed to create a cash flow equivalent to an individual's SP........and as the size and date of the SP are practically unique to each individual, the bond ladder would be too. (for the most part anyway).
Forum member LateGenXer has kindly made a tool available here to assist in creating bond ladders. ....lategenxer.streamlit.app/Gilt_Ladder.......looks very useful for someone thinking of such a bond ladder, though I've not used it myself.
PS......don't forget to select "index-linked" for an SP bridge bond ladder...2
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