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.
Comments
-
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...0 -
Secret2ndAccount said: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.0
-
Secret2ndAccount said: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.0 -
Secret2ndAccount 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.
I think....1 -
Secret2ndAccount 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.
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).
1 -
OldScientist said:Secret2ndAccount 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.
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).
PS.....I understand the posts are actually talking about "real" returns.......just wanted to reinforce the point about returns and inflation0 -
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.1
-
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.3
-
michaels said:Secret2ndAccount 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.
0 -
MK62 said:OldScientist said:Secret2ndAccount 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.
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).
PS.....I understand the posts are actually talking about "real" returns.......just wanted to reinforce the point about returns and inflation
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.1
Confirm your email address to Create Threads and Reply

Categories
- All Categories
- 348.4K Banking & Borrowing
- 252.1K Reduce Debt & Boost Income
- 452.4K Spending & Discounts
- 241K Work, Benefits & Business
- 617.3K Mortgages, Homes & Bills
- 175.7K Life & Family
- 254.1K Travel & Transport
- 1.5M Hobbies & Leisure
- 16K Discuss & Feedback
- 15.1K Coronavirus Support Boards