SWR Come What May

SouthCoastBoy

Linton said:

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.

Yes, that's my philosophy as well. My spending will always come from the buffer, and I will top up the buffer when I feel the time is suitable 

coyrls

SouthCoastBoy said:

Linton said:

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.

Yes, that's my philosophy as well. My spending will always come from the buffer, and I will top up the buffer when I feel the time is suitable 

What you are describing sounds like Prime Harvesting from a portfolio of equities and bonds but where cash is substituted for bonds.  The "topping up" is more formalised in Prime Harvesting, so rather than topping up when you "feel the time is suitable", the Prime Harvesting method tops up (sell equities to buy bonds, or in your case sell to cash) if your equity assets are greater than 120% of their initial value after annually adjusting for inflation.  In that case 20% of the equities are sold to buy additional bonds (or in your case sold to cash).

kempiejon

@SouthCoastBoy I'm working a similar strategy. Some of my investment profit goes to the buffer. HOw are you approaching the following?

How did you deduce how big your buffer needs to be?
How do you generate income to add to the buffer?
What happens if the buffer is too big or keeps growing?
What's the plan if the amount added to the buffer is less than withdrawn?

coyrls

The downside of not adopting a formal approach to taking income from a portfolio is that the informal approach has to rely on "knowing" or "feeling" when to do something.

coyrls

The same issue arises with portfolio construction; you can either adopt a formal asset allocation strategy with periodic or trigger-based rebalancing, or you can go with something that you know or feel is right and buy and sell when you know or feel it's the right thing to do.

I know which approach I prefer but I know that others know or feel differently.

SouthCoastBoy

kempiejon said:

@SouthCoastBoy I'm working a similar strategy. Some of my investment profit goes to the buffer. HOw are you approaching the following?

How did you deduce how big your buffer needs to be?
How do you generate income to add to the buffer?
What happens if the buffer is too big or keeps growing?
What's the plan if the amount added to the buffer is less than withdrawn?

I'm in a fortunate position as I have a rather large pot. I'm 60% equities 40% cash. My cash could most probably last for 15+ years, so I may never cash in equities, depending on how long I live. I just knew I wanted a large cash buffer to de risk. I'm not interested in maximising returns, I just don't want to run out of money. I appreciate my cash will devalue in real times but I'm comfortable with that as I still have a substantial equity investment

Income for the buffer will come from equity growth. I hold around 1m of equities in isas and sipp. 

My buffer will only ever decrease from the original amount. I don't anticipate cashing any equities in for at least 7 years, by which time I will be receiving my state pension and my wife hers 3 years later, so need for cash from the buffer will reduce, especially as my wife has a db pension paying 13k in today's money in 10 years time. 

Hopefully that has gone someway to answering the questions above.

barnstar2077

SouthCoastBoy said:

kempiejon said:

@SouthCoastBoy I'm working a similar strategy. Some of my investment profit goes to the buffer. HOw are you approaching the following?

How did you deduce how big your buffer needs to be?
How do you generate income to add to the buffer?
What happens if the buffer is too big or keeps growing?
What's the plan if the amount added to the buffer is less than withdrawn?

I'm in a fortunate position as I have a rather large pot. I'm 60% equities 40% cash. My cash could most probably last for 15+ years, so I may never cash in equities, depending on how long I live. I just knew I wanted a large cash buffer to de risk. I'm not interested in maximising returns, I just don't want to run out of money. I appreciate my cash will devalue in real times but I'm comfortable with that as I still have a substantial equity investment

Income for the buffer will come from equity growth. I hold around 1m of equities in isas and sipp. 

My buffer will only ever decrease from the original amount. I don't anticipate cashing any equities in for at least 7 years, by which time I will be receiving my state pension and my wife hers 3 years later, so need for cash from the buffer will reduce, especially as my wife has a db pension paying 13k in today's money in 10 years time. 

Hopefully that has gone someway to answering the questions above.

You may very well have the most watertight plan I have read of on these forums!

I am the other end of the scale when it comes to my views on volatility, holding cash, etc, but my pot is a fraction of the size.

So our respective plans make sense for our circumstances and our appetites for risk.  There really is no one size fits all.

Hoenir

There was a decade when US equities underperformed inflation as a whole, and only of 4%  beat the return on cash. Always plan on the unexpected. 

kempiejon

@SouthCoastBoy Ta for your details. It looks to me like you have a surfeit of money such you don't need to sweat your assets like I do, Excellent.
As an off topic aside as your SWR is irrelevant here as you don;t need to worry, what's the plan for de accumulating your wealth?

SouthCoastBoy

Obviously I will decummulate some of wealth by simply holding so much cash, however I don't anticipate spending all my wealth, I imagine I will leave it as inheritance. 

Strangely I've never been interested in spending money, but always had an interest in finance and investments, so started investing in peps many years ago when I was in my mid 20s. 

For me money brings security and gives me options if I ever need them.