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Real Rate of Return Required for SWR

I have too much of my pot in cash. I understand how I got to that position, but with a 5% risk free return on offer I have been slow to get money into the stock market. Now rates are falling, but so is inflation. I can still generate a positive real return with no risk. This leads me to a question:

For a 60/40 portfolio with 30 year SWR drawdown, what is the real rate of return required for success. In the bad scenarios where the pot only just survived, what was the real (after inflation) rate of return achieved? I’ve never seen that chart.


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  • A quick calculation tells me that if you could achieve 1.3% above inflation, you could sustain a 4% withdrawal rate from an all cash pot for 30 years. I'm more of a 3% believer for SWR's. To achieve that you would need inflation minus 0.7%.
    So it seems with current rates I don't need to be in a big rush to get my cash into equities to get my balance back to 50/50 or 60/40.
    Of course, with this plan there is no chance that your portfolio doubles and you are left with an ever-growing cash pile. But there is also no chance the pot gets cut in half...
  • Hoenir
    Hoenir Posts: 5,740 Forumite
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    edited 4 October 2024 pm31 9:51PM
    A quick calculation tells me that if you could achieve 1.3% above inflation, you could sustain a 4% withdrawal rate from an all cash pot for 30 years.
    If investing was that straightforward there'd be no financial services industry and we'd all be multi millionaires. 
  • Audaxer
    Audaxer Posts: 3,547 Forumite
    Seventh Anniversary 1,000 Posts Name Dropper
    A quick calculation tells me that if you could achieve 1.3% above inflation, you could sustain a 4% withdrawal rate from an all cash pot for 30 years. I'm more of a 3% believer for SWR's. To achieve that you would need inflation minus 0.7%.
    So it seems with current rates I don't need to be in a big rush to get my cash into equities to get my balance back to 50/50 or 60/40.
    Of course, with this plan there is no chance that your portfolio doubles and you are left with an ever-growing cash pile. But there is also no chance the pot gets cut in half...
    I've done a quick spreadsheet calculation a slightly different way. Say an initial cash pot of £100k received 3% interest each year for 30 years, and you withdrew a 'SWR' of 3% that you increased by 2.5% each year for inflation. By my calculations you would still have nearly £45k left after 30 years. If you increased your withdrawals by 5% each year for inflation, you would run out of money by year 27. 

    However in real life you might need to increase your withdrawals by different percentages some years depending on inflation, and interest rates will change over the 30 years. So although it could last 30 years, I'd prefer to have it invested in at least a 60/40 portfolio, rather than have it all kept in cash. 
  • michaels
    michaels Posts: 28,796 Forumite
    Part of the Furniture 10,000 Posts Photogenic Name Dropper
    edited 5 October 2024 am31 11:26AM

    I have too much of my pot in cash. I understand how I got to that position, but with a 5% risk free return on offer I have been slow to get money into the stock market. Now rates are falling, but so is inflation. I can still generate a positive real return with no risk. This leads me to a question:

    For a 60/40 portfolio with 30 year SWR drawdown, what is the real rate of return required for success. In the bad scenarios where the pot only just survived, what was the real (after inflation) rate of return achieved? I’ve never seen that chart.


    Where can you get a 5% risk free real return?  I thought index linked gilts held to maturity were returning about par?
    I think....
  • I have too much of my pot in cash. I understand how I got to that position, but with a 5% risk free return on offer I have been slow to get money into the stock market. Now rates are falling, but so is inflation. I can still generate a positive real return with no risk. This leads me to a question:

    For a 60/40 portfolio with 30 year SWR drawdown, what is the real rate of return required for success. In the bad scenarios where the pot only just survived, what was the real (after inflation) rate of return achieved? I’ve never seen that chart.


    Historical worst case real annualised returns over rolling periods of 30 years (I've used the return and inflation data from macrohistory.net):
    UK stocks: 1.1%
    UK long bonds: -4.2%
    UK cash: -2.2%
    60/40 portfolio stocks/bonds: -0.3%
    60/40 portfolio stocks/cash: 0.6%

    Returns for portfolios with international stocks and bonds would have been slightly higher and the median cases are a lot better than these (5.3% for stocks, 1.3% for long bonds, and 1.0% for cash).

    Note that the SWR (which was about 3.0% to 3.5% for the UK) is critically dependent on sequence of returns - i.e. negative returns early on in the retirement have a much larger effect than negative returns later in retirement. Simple calculations that use constant rates of return will overestimate the income available (but it is easy enough to model the effect of a negative real return early on).

    As has already been mentioned, since linker yields are currently a shade over 1%, a 30 year linker ladder could be constructed with a payout rate of about 3.8% (and joint life annuities have similar payout rates at 65).

  • MK62
    MK62 Posts: 1,681 Forumite
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    edited 5 October 2024 pm31 12:41PM

    I have too much of my pot in cash. I understand how I got to that position, but with a 5% risk free return on offer I have been slow to get money into the stock market. Now rates are falling, but so is inflation. I can still generate a positive real return with no risk. This leads me to a question:

    For a 60/40 portfolio with 30 year SWR drawdown, what is the real rate of return required for success. In the bad scenarios where the pot only just survived, what was the real (after inflation) rate of return achieved? I’ve never seen that chart.


    Historical worst case real annualised returns over rolling periods of 30 years (I've used the return and inflation data from macrohistory.net):
    UK stocks: 1.1%
    UK long bonds: -4.2%
    UK cash: -2.2%
    60/40 portfolio stocks/bonds: -0.3%
    60/40 portfolio stocks/cash: 0.6%

    Returns for portfolios with international stocks and bonds would have been slightly higher and the median cases are a lot better than these (5.3% for stocks, 1.3% for long bonds, and 1.0% for cash).

    Note that the SWR (which was about 3.0% to 3.5% for the UK) is critically dependent on sequence of returns - i.e. negative returns early on in the retirement have a much larger effect than negative returns later in retirement. Simple calculations that use constant rates of return will overestimate the income available (but it is easy enough to model the effect of a negative real return early on).

    .......and the sequence of inflation.........high inflation during the early years of retirement can be almost as damaging as poor returns......a "perfect storm" of high inflation AND poor returns during the early years could be very "challenging", to say the least.


    PS.....I understand the posts are actually talking about "real" returns.......just wanted to reinforce the point about returns and inflation
  • NedS
    NedS Posts: 4,083 Forumite
    Fifth Anniversary 1,000 Posts Photogenic Name Dropper
    I'm happy to hold a good proportion of cash right now (as dry powder), as it's giving a risk free real return whilst equities are at all time highs and helps to offset SOR risks, but I recognise that equities are going to give me the best returns over a 30-40 year retirement period so I will be looking to reduce my cash position either when returns are no longer above inflation and/or equity markets fall.

  • BoxerfanUK
    BoxerfanUK Posts: 723 Forumite
    Part of the Furniture 500 Posts Photogenic
    edited 6 October 2024 pm31 2:21PM
    NedS said:
    I'm happy to hold a good proportion of cash right now (as dry powder), as it's giving a risk free real return whilst equities are at all time highs and helps to offset SOR risks, but I recognise that equities are going to give me the best returns over a 30-40 year retirement period so I will be looking to reduce my cash position either when returns are no longer above inflation and/or equity markets fall.

    I'm with you, but cue comments that you are 'timing' the market :)
  • Hoenir
    Hoenir Posts: 5,740 Forumite
    1,000 Posts First Anniversary Name Dropper
    michaels said:

    I have too much of my pot in cash. I understand how I got to that position, but with a 5% risk free return on offer I have been slow to get money into the stock market. Now rates are falling, but so is inflation. I can still generate a positive real return with no risk. This leads me to a question:

    For a 60/40 portfolio with 30 year SWR drawdown, what is the real rate of return required for success. In the bad scenarios where the pot only just survived, what was the real (after inflation) rate of return achieved? I’ve never seen that chart.


    Where can you get a 5% risk free real return?  
    Remains an unanswered question. Is the OP having a rethink ?
  • Albermarle
    Albermarle Posts: 25,993 Forumite
    10,000 Posts Sixth Anniversary Name Dropper
    MK62 said:

    I have too much of my pot in cash. I understand how I got to that position, but with a 5% risk free return on offer I have been slow to get money into the stock market. Now rates are falling, but so is inflation. I can still generate a positive real return with no risk. This leads me to a question:

    For a 60/40 portfolio with 30 year SWR drawdown, what is the real rate of return required for success. In the bad scenarios where the pot only just survived, what was the real (after inflation) rate of return achieved? I’ve never seen that chart.


    Historical worst case real annualised returns over rolling periods of 30 years (I've used the return and inflation data from macrohistory.net):
    UK stocks: 1.1%
    UK long bonds: -4.2%
    UK cash: -2.2%
    60/40 portfolio stocks/bonds: -0.3%
    60/40 portfolio stocks/cash: 0.6%

    Returns for portfolios with international stocks and bonds would have been slightly higher and the median cases are a lot better than these (5.3% for stocks, 1.3% for long bonds, and 1.0% for cash).

    Note that the SWR (which was about 3.0% to 3.5% for the UK) is critically dependent on sequence of returns - i.e. negative returns early on in the retirement have a much larger effect than negative returns later in retirement. Simple calculations that use constant rates of return will overestimate the income available (but it is easy enough to model the effect of a negative real return early on).

    .......and the sequence of inflation.........high inflation during the early years of retirement can be almost as damaging as poor returns......a "perfect storm" of high inflation AND poor returns during the early years could be very "challenging", to say the least.


    PS.....I understand the posts are actually talking about "real" returns.......just wanted to reinforce the point about returns and inflation
    I retired in Mid 2021, and 18 months later my DC pots were down 20% in real terms.
    Luckily I had no need to draw on them, but it reinforces what you say about a combination of high inflation and negative returns.
    I also consoled myself with the fact that the previous decade had seen high returns and low inflation, so swings and roundabouts as usual. 
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