SWR Come What May

SouthCoastBoy

I intend to solely live off cash for the first 10 years of retirement, then during this time top up the cash if the equity position is favourable. On my current spreadsheet if I live to 100 I should have around 1m in today's money, so feel don't need to take any additional risks.

Cus

SouthCoastBoy said:

I intend to solely live off cash for the first 10 years of retirement, then during this time top up the cash if the equity position is favourable. On my current spreadsheet if I live to 100 I should have around 1m in today's money, so feel don't need to take any additional risks.

So you are on the very risk adverse side of the investor spectrum. Nothing wrong with that, got to sleep at night 

NoMore

@Linton Maybe I've missed this in your posts about your strategy, but you seem to have a multi-bucket system with (semi-?) auto rebalancing. Sorry if that's a crude description or wrong.

However what I don't understand is what is the answer for your system to the question that all these other strategies like SWR , VPW etc are trying to answer - How much can I confidently withdraw yearly (X) from a portfolio of value Y and not run out of money for my lifetime? or to switch it round If I want X, how big must Y be ? Whether they are successful at answering this is up for debate, but essentially that's what they are trying to do.

You seem to describe a method for withdrawing X from Y, but I'm unsure what the relationship between X and Y is, as in for 4% SWR its X is 4% of Y (inflation adjusted each year).

Hoenir

westv said:

Hoenir said:

Linton said:

MK62 said:

In the end, in drawdown, variable expenditure (or income) may become unavoidable, unless your draw rate is so low that it can withstand almost any return/inflation scenario.......but then you'd be likely living well below your means unnecessarily.

Yes, if your pot is in a long term decline (say > 5 years) to a level where your ongoing drawdown is looking in doubt then a replan to respecify your needs could be essential.  However you should be able to avoid cutting expenditure during the normal once or twice a decade crash.

Not the crash that's the issue. Recovery to previous market highs is. As an example. S&P 500 peaked in 2007. Only recovered to same level in 2013. Some 6 years later. 

Does that include reinvestment of income?

Yield on the SP500 is historically low. Currently 1.32%, long term average 1.83%. With the Fed keeping inflation in the 2% - 2.5% range. Then withdrawls would have been neccessary from capital disposals as income alone will not suffice. Over the corresponding period the £ $ exchange rate was also a slight negative factor for UK investors. 

GazzaBloom

Hoenir said:

westv said:

Hoenir said:

Linton said:

MK62 said:

In the end, in drawdown, variable expenditure (or income) may become unavoidable, unless your draw rate is so low that it can withstand almost any return/inflation scenario.......but then you'd be likely living well below your means unnecessarily.

Yes, if your pot is in a long term decline (say > 5 years) to a level where your ongoing drawdown is looking in doubt then a replan to respecify your needs could be essential.  However you should be able to avoid cutting expenditure during the normal once or twice a decade crash.

Not the crash that's the issue. Recovery to previous market highs is. As an example. S&P 500 peaked in 2007. Only recovered to same level in 2013. Some 6 years later. 

Does that include reinvestment of income?

Yield on the SP500 is historically low. Currently 1.32%, long term average 1.83%. With the Fed keeping inflation in the 2% - 2.5% range. Then withdrawls would have been neccessary from capital disposals as income alone will not suffice. Over the corresponding period the £ $ exchange rate was also a slight negative factor for UK investors. 

A decade bookended by the Dot Com bubble burst, 9/11 and the subsequent "war on terror", at one end and the GFC at the other.

In that scenario an S&P500 retirees drawdown would eat into the starting capital.

But...that what it's there for.

OldScientist

Linton said:

OldScientist said:

Linton said:

OldScientist said:

Linton said:

OldScientist said:

NoMore said:

jim8888 said:

NoMore said:

Its a deceptively simple answer to a extremely difficult problem, unfortunately you can't guarantee its the right answer.

I'm also pretty sure 90% (outside this thread/forum) misunderstand it and think it means 4% (or whatever SWR%) of your remaining portfolio every year not the correct method which is 4% of the initial portfolio and then adjust that number each year for inflation such that your spending power each year remains the same. 

Thanks for that clarification. I'd be in the 90% and I thought I knew about this stuff !

As I said its a common misconception, but if you did the 4% of remaining each year, your withdrawals could vary wildly depending on gains/losses. The SWR avoids this by setting a initial amount and then adjusting it for inflation. The idea is like a yearly wage its predictable what you will get, with a 4% of remaining you have no idea year to year what you will be withdrawing.

The predictability (or otherwise) of income is a critical point. Withdrawal strategies can broadly be divided into three categories
1) Inflation adjusted (of which constant inflation adjusted, i.e., SWR is the best known). From an income point of view, the advantage is that the income is known, but the disadvantage is that how long the income will last for is not.
2) Percentage of portfolio (e.g., constant percentage, bogleheads VPW or ABW, 1/N, possibly natural yield, etc.). The advantage is that, mathematically, income will be delivered for a lifetime, but the disadvantage is that real income will vary from year to year and, potentially, become small.
3) Hybrid methods, and there are loads, combine elements of inflation linked and percentage of portfolio methods (e.g., Guyton Klinger, Vanguard Dynamic, Carlson's endowment, Bengen’s floor and ceiling, etc.). Income is less variable than in the percentage of portfolio case (although can still get small in poor retirements) and there is less chance of portfolio exhaustion than in the inflation adjusted case.

However, whether you care about variability or failure in drawdown income depends on what fraction it forms of your spending (whether essential or the total of essential and discretionary).

For example

For a couple with two state pensions (£23k), and a combined pension pot of £150k (and an inflation adjusted income of ~£4.5k). If their state pensions cover their essential spending and at least some of their discretionary, then the drawdown income is just ‘icing on the cake’ and pretty well any withdrawal strategy could be adopted because variability or failure can easily be accommodated. I suspect a number of the denizens on these boards fall into this category.

However, for a couple with two state pensions (£23k), a combined pension pot of £800k (inflation adjusted income ~£24k), an essential spend of £40k, and a discretionary spend of a further £10k, things are a bit tricker since a portfolio failure would leave them with insufficient income to support their essential spend and percentage of portfolio methods might leave them short in some years. Playing around with different hybrid approaches might provide a solution, but there is always the possibility of failure. However, purchasing sufficient RPI protected income annuity to provide most or all of the essential spend (i.e., up to an additional £17k costing around £400-£450k for a joint life – even if payout rates fall back to 3%, this would still ‘only’ cost £560k) and then withdrawing the remaining pot using whatever method desired. Of course, an alternative approach might be to revise what is considered essential spending and what discretionary.

There is a 4th strategy.  Plan on taking what you need, invest for long term growth with a high global diversification, and ensure you have sufficient slack to last n years with zero equity growth.  Choose "n" and "need" on the basis of what you can afford and are prepared to accept in the knowledge that there is no investment based strategy that will work in all conceivable circumstances.

In my view the academic strategies are fine to boost the authors professional ratings, book sales, and earnings from the lecture circuit./  To be fair they may be helpful in giving you the confidence to jump.  But I find it difficult to believe that any but a very small number of people will put any of them into practice over the long term.

Does anyone here who has retired actually use an academic strategy? If so which one?

IMV, defining 'what you can afford' is one element of the withdrawal strategies.

In answer to your question, yes
1) Floor provided by an inflation protected DB pension (which will be added to once in receipt of the SP)
2) Portfolio withdrawals using a modified version of VPW (so withdrawals vary from year to year).
3) Inflation linked ladder (and life insurance) to cover the period before my OH gets their SP in the event of my death.

I don't know whether 1) counts as an 'academic' strategy, but had I not had a DB pension, I would have built as sufficient flooring using an annuity instead (does buying an annuity count as an 'academic' strategy?).

I am solely referring to long term strategies intended to manage drawdown from volatile investments. If you can meet your needs without it that is fine but its not what I am discussing..

As a basic principle I would argue against any strategy that imposes variable expenditure over time depending on the then current economic circumstances.  So that would rule out VPW (Variable % withdrawal) unless one had a sufficiently large buffer to cover the difficult times. 

Just to be clear, are you arguing for constant inflation adjusted withdrawals (i.e., some form of SWR) then, since any other type would introduce variable real expenditure?

The 'buffer' can come from guaranteed income (whether SP, DB pension, RPI annuity, Edit: or inflation linked gilt ladder) - i.e., a 'floor and upside' approach.

I am not arguing for constant inflation linked withdrawals.  That sounds too prescriptive. The aim is to be able to spend what one wants to spend when one wants to spend it.

What I am arguing for in other threads is a large lower risk buffer from which all income is taken.  The buffer is fed by interest/dividends from income funds,by annuities/SP and if necessary by lump sums from a growth portfolio.  So withdrawal from growth funds is a strategic decision, not a regular feed.

By decoupling expenditure from sale of growth funds one can take a medium term approach.with minimal disruption from isolated crashes and thus no need to slash expnditure at short notice.

Thank you for clarifying. If I now understand correctly, you are using a 'cash' buffer to smooth short term variations in your income.

I note that research (pesky academics and finance people!) results are mixed,

https://www.financialplanningassociation.org/article/journal/SEP13-benefits-cash-reserve-strategy-retirement-distribution-planning suggests that a one year cash buffer improves retirement outcomes once (US) taxes and transaction costs are accounted for.

The results at  https://finalytiq.co.uk/cash-reserve-buffers-withdrawal-rates-old-wives-fables-retirement-portfolio/ suggests that replacing bonds with cash can improve portfolio longevity in the worst historical cases but at the cost of reduced legacy in the best.

While https://www.kitces.com/blog/research-reveals-cash-reserve-strategies-dont-work-unless-youre-a-good-market-timer/ (and the underlying research at https://bpb-us-w2.wpmucdn.com/sites.udel.edu/dist/a/855/files/2020/08/Sustainable-Withdrawal-Rates.pdf ) suggests that the return drag of a large cash buffer outweighs any positive effect of the underlying market timing.

I do note that, as far as I can tell, in each case cash returns are modelled as those of 3 month bills. This is probably a reasonably proxy although at times rates on easy access accounts will be higher than this and at other times a lower. However, a rolling ladder of 1 year fixed rate accounts will probably tend to do better.

However, the psychological effect has to be acknowledged since the cash buffer may help reduce panic in large market downturns.

For me, the nice thing about this thread is that it illustrates that there isn't one 'magic' solution to retirement planning!

Bobziz

Doesn't a cash buffer or rolling linkers ladder also provide the confidence to go more aggressive on equities too ? So a 60/40 might become an 80/20.

kempiejon

Am I 100% equities with a 2 year cash buffer or 80:20% equities:bonds because my 2 year buffer is approximately equal to 20% of my investable wealth?

I like to keep my spending money separate from my investing money but that's purely psychological the money isn't in anyway different.
I hold Premium bonds as part of the cash buffer and also have a couple of laddered gilts for next 3 years, the gilts are in my SIPP account with known maturity dates and amounts and obviously PBs are just like normal cash. And I have cash in regular savers and 1 year fixed term accounts.

I don't really work too hard at defining my strategy or managing it any more but it looks to me like the pot is adequate, my planning is pessimistic so some opportunity cost for that cash but it suits my mindset.
When I started it was all equities, over the decades I think cash and asset allocations is more useful to me as my earning potential declines.

Linton

Bobziz said:

Doesn't a cash buffer or rolling linkers ladder also provide the confidence to go more aggressive on equities too ? So a 60/40 might become an 80/20.

Precisely.  The way I look at it is that you could have a 60/40 portfolio but use the 40% as a buffer.

Linton

OldScientist said:

Linton said:

OldScientist said:

Linton said:

OldScientist said:

Linton said:

OldScientist said:

NoMore said:

jim8888 said:

NoMore said:

Its a deceptively simple answer to a extremely difficult problem, unfortunately you can't guarantee its the right answer.

I'm also pretty sure 90% (outside this thread/forum) misunderstand it and think it means 4% (or whatever SWR%) of your remaining portfolio every year not the correct method which is 4% of the initial portfolio and then adjust that number each year for inflation such that your spending power each year remains the same. 

Thanks for that clarification. I'd be in the 90% and I thought I knew about this stuff !

As I said its a common misconception, but if you did the 4% of remaining each year, your withdrawals could vary wildly depending on gains/losses. The SWR avoids this by setting a initial amount and then adjusting it for inflation. The idea is like a yearly wage its predictable what you will get, with a 4% of remaining you have no idea year to year what you will be withdrawing.

The predictability (or otherwise) of income is a critical point. Withdrawal strategies can broadly be divided into three categories
1) Inflation adjusted (of which constant inflation adjusted, i.e., SWR is the best known). From an income point of view, the advantage is that the income is known, but the disadvantage is that how long the income will last for is not.
2) Percentage of portfolio (e.g., constant percentage, bogleheads VPW or ABW, 1/N, possibly natural yield, etc.). The advantage is that, mathematically, income will be delivered for a lifetime, but the disadvantage is that real income will vary from year to year and, potentially, become small.
3) Hybrid methods, and there are loads, combine elements of inflation linked and percentage of portfolio methods (e.g., Guyton Klinger, Vanguard Dynamic, Carlson's endowment, Bengen’s floor and ceiling, etc.). Income is less variable than in the percentage of portfolio case (although can still get small in poor retirements) and there is less chance of portfolio exhaustion than in the inflation adjusted case.

However, whether you care about variability or failure in drawdown income depends on what fraction it forms of your spending (whether essential or the total of essential and discretionary).

For example

For a couple with two state pensions (£23k), and a combined pension pot of £150k (and an inflation adjusted income of ~£4.5k). If their state pensions cover their essential spending and at least some of their discretionary, then the drawdown income is just ‘icing on the cake’ and pretty well any withdrawal strategy could be adopted because variability or failure can easily be accommodated. I suspect a number of the denizens on these boards fall into this category.

However, for a couple with two state pensions (£23k), a combined pension pot of £800k (inflation adjusted income ~£24k), an essential spend of £40k, and a discretionary spend of a further £10k, things are a bit tricker since a portfolio failure would leave them with insufficient income to support their essential spend and percentage of portfolio methods might leave them short in some years. Playing around with different hybrid approaches might provide a solution, but there is always the possibility of failure. However, purchasing sufficient RPI protected income annuity to provide most or all of the essential spend (i.e., up to an additional £17k costing around £400-£450k for a joint life – even if payout rates fall back to 3%, this would still ‘only’ cost £560k) and then withdrawing the remaining pot using whatever method desired. Of course, an alternative approach might be to revise what is considered essential spending and what discretionary.

There is a 4th strategy.  Plan on taking what you need, invest for long term growth with a high global diversification, and ensure you have sufficient slack to last n years with zero equity growth.  Choose "n" and "need" on the basis of what you can afford and are prepared to accept in the knowledge that there is no investment based strategy that will work in all conceivable circumstances.

In my view the academic strategies are fine to boost the authors professional ratings, book sales, and earnings from the lecture circuit./  To be fair they may be helpful in giving you the confidence to jump.  But I find it difficult to believe that any but a very small number of people will put any of them into practice over the long term.

Does anyone here who has retired actually use an academic strategy? If so which one?

IMV, defining 'what you can afford' is one element of the withdrawal strategies.

In answer to your question, yes
1) Floor provided by an inflation protected DB pension (which will be added to once in receipt of the SP)
2) Portfolio withdrawals using a modified version of VPW (so withdrawals vary from year to year).
3) Inflation linked ladder (and life insurance) to cover the period before my OH gets their SP in the event of my death.

I don't know whether 1) counts as an 'academic' strategy, but had I not had a DB pension, I would have built as sufficient flooring using an annuity instead (does buying an annuity count as an 'academic' strategy?).

I am solely referring to long term strategies intended to manage drawdown from volatile investments. If you can meet your needs without it that is fine but its not what I am discussing..

As a basic principle I would argue against any strategy that imposes variable expenditure over time depending on the then current economic circumstances.  So that would rule out VPW (Variable % withdrawal) unless one had a sufficiently large buffer to cover the difficult times. 

Just to be clear, are you arguing for constant inflation adjusted withdrawals (i.e., some form of SWR) then, since any other type would introduce variable real expenditure?

The 'buffer' can come from guaranteed income (whether SP, DB pension, RPI annuity, Edit: or inflation linked gilt ladder) - i.e., a 'floor and upside' approach.

I am not arguing for constant inflation linked withdrawals.  That sounds too prescriptive. The aim is to be able to spend what one wants to spend when one wants to spend it.

What I am arguing for in other threads is a large lower risk buffer from which all income is taken.  The buffer is fed by interest/dividends from income funds,by annuities/SP and if necessary by lump sums from a growth portfolio.  So withdrawal from growth funds is a strategic decision, not a regular feed.

By decoupling expenditure from sale of growth funds one can take a medium term approach.with minimal disruption from isolated crashes and thus no need to slash expnditure at short notice.

Thank you for clarifying. If I now understand correctly, you are using a 'cash' buffer to smooth short term variations in your income.

I note that research (pesky academics and finance people!) results are mixed,

https://www.financialplanningassociation.org/article/journal/SEP13-benefits-cash-reserve-strategy-retirement-distribution-planning suggests that a one year cash buffer improves retirement outcomes once (US) taxes and transaction costs are accounted for.

The results at  https://finalytiq.co.uk/cash-reserve-buffers-withdrawal-rates-old-wives-fables-retirement-portfolio/ suggests that replacing bonds with cash can improve portfolio longevity in the worst historical cases but at the cost of reduced legacy in the best.

While https://www.kitces.com/blog/research-reveals-cash-reserve-strategies-dont-work-unless-youre-a-good-market-timer/ (and the underlying research at https://bpb-us-w2.wpmucdn.com/sites.udel.edu/dist/a/855/files/2020/08/Sustainable-Withdrawal-Rates.pdf ) suggests that the return drag of a large cash buffer outweighs any positive effect of the underlying market timing.

I do note that, as far as I can tell, in each case cash returns are modelled as those of 3 month bills. This is probably a reasonably proxy although at times rates on easy access accounts will be higher than this and at other times a lower. However, a rolling ladder of 1 year fixed rate accounts will probably tend to do better.

However, the psychological effect has to be acknowledged since the cash buffer may help reduce panic in large market downturns.

For me, the nice thing about this thread is that it illustrates that there isn't one 'magic' solution to retirement planning!

I think you will find that the academic studies model a very different management approach. If you just have a one-year buffer you really are doing little more than withdrawing a year early.  A year is rather short time period if you are trying to avoid the problems of taking a steady income from volatile equity.

One common criticism of low risk buffer approaches is that they require timing decisions as to when to start and stop using the buffer.  What I am proposing is that you never switch - expenditure always comes from the buffer.