SWR Come What May

Time4T_Accounts

Yes, I thought that. But when you factor in some sort of profit factor, then it suggests that their life expectancy calc is somewhat shorter.  It does focus the mind though (and highlights what this thread has been about, that we all have individual SWR’s).

OldScientist

Triumph13 said:

Linton said:

Triumph13 said:y

MK62 said:

westv said:

Linton said:

Moonwolf said:

Once people start using large cash buffers to protect against variability do annuities become more attractive?

I'm holding a bit of cash but my DC is mostly equities.  This is because I have enough DB to cover everything I need and then some.  If I didn't have my DB but had a bigger and big enough DC pot I would definitely be thinking of using an annuity rather than cash.

My current spreadsheets multiply cash by .98 each year on the assumption that I lose in real terms against inflation.  Although annuities are often compare to SWR of 3%, 3.5% or 4%, that assumes equity growth, try that against a cash rich portfolio is the SWR worse? 

Annuities certainly are worth considering now that the rates are reasonable.  However the problem is their complete lack of flexibility.  How do you handle large one-off expenditure. Save up for 10 years?

Presumably there would also be a reasonable sized TFLS which might be used for one off outgoings - or partly used. 

Then that effectively becomes a cash buffer....

Which gets us back to the fundamental issue that even those saying they couldn't possibly cope with a varying income are still going to have varying levels of expenditure because of big one-off expenses...

One is likely to want varying expenditure in some circumstances such as one off purchases. The money management system should be able to provide for it when required. What is unacceptable is being forced to implement varying expenditure on normal day to day items because the short term rules  prevent you taking the income you need.

A buffering approach lets you ignore the short term volatility so you only need to concern yourself with the long term.

The real buffer that I think we both have, is having more assets than we need for the income we desire.  You deal with that by accepting drag from buffers and the inherent risk of market timing on your growth assets, because you know you have the slack to get away with that approach.  I accept a variable income because I have enough slack that I'm confident the income won't drop low enough to seriously inconvenience me - helped by having a DB/SP floor that covers core spending.  

At the end of the day, the key is having the slack that you are not having to sweat every ounce of income from your assets.  After that, it doesn't particularly matter too much whether that slack is in investments (low SWR), cash (big buffers) or income (larger than needed).  Pick the option that suits.  

I think what you have said make a lot of sense.

In my own plan, a DB pension currently provides about 85% of our general expenditure (and over 100% of our core expenditure) with variable portfolio withdrawals covering the remaining part. A reduction in portfolio income of 50% after a market reduction, would see our income fall from 100% to 92.5% - not pleasant but not a disaster.

From what Linton said above, about two thirds of their normal expenditure is provided by SP and annuities and, if I have understood correctly, one third by dividends and interest. The cash buffer then helps smooth out variations in that one-third.

For those with expenditure much greater than their income floor or have less slack, there are some options that could be considered
1) Build more flooring (e.g., make sure SP is maximised, purchase RPI annuities, or create an inflation linked gilt ladder)
2) Use a conservative SWR and hope for the best (so back to the original topic!)
3) Use a variable withdrawal approach with some sort of smoothing. Whether that is a cash buffer or one of the many different withdrawal strategies, is a matter of personal taste. A practical demonstration of a relative short cash buffer (or dampening account as it is termed in the linked thread) can be found in the ongoing (and very long) thread at https://www.bogleheads.org/forum/viewtopic.php?t=284519

OldScientist

MK62 said:

If you operate your cash buffer as a true buffer, rather than a "standby" pot, then the amount going in can vary each year, while the amount coming out remains relatively constant (in real terms).....with the level of cash in the buffer varying accordingly. This is what I, and I'm assuming Linton too, mean by decoupling income from spending. Obviously though, you can only operate for so long with less going in than coming out......so in good years you may be putting more in than comes out. Such is the tradeoff......

As you say, while the cash buffer is good at smoothing short term variation, over long periods of poor real returns and, hence, declining portfolio withdrawals, it will run out. The question is whether the outcome is then better or worse than not having had the buffer in the first place or using some other short-term income smoothing mechanism. 

I note that the last few decades are fairly untypical historically since, at least until two years ago, there were strong bond returns (as the high yields of the 1980s wound down) and a decade of strong equity returns (albeit after a more variable decade).

kempiejon

Ah, I hope the next decades are not too different. I have records back to 2005, I was investing a bit before then but not earnestly and the records are not up to much. Since 2005 I have been measuring my returns using excells IPP function XIRR and over the whole period my portfolio has grown on average 8% per year but I have seen highs of +20% and losses of -50%.

My cash buffer, is insurance against being caught in a market slump needing to take out more than natural growth. Cash is eroded by inflation and is a missed opportunity so holding it is an expense to mitigate risk. Sometimes I can get inflation matching return on cash. I have found my investments are generally better than cash, sometime much better but not without losses.
Checking some numbers on my spreadsheet yesterday I am currently at 12% cash. That is above a long term average but I am expecting to have a large expenses in 2025 so I am letting cash accumulate a bit, I would normally be reinvesting cash above certain level..

MK62

OldScientist said:

MK62 said:

If you operate your cash buffer as a true buffer, rather than a "standby" pot, then the amount going in can vary each year, while the amount coming out remains relatively constant (in real terms).....with the level of cash in the buffer varying accordingly. This is what I, and I'm assuming Linton too, mean by decoupling income from spending. Obviously though, you can only operate for so long with less going in than coming out......so in good years you may be putting more in than comes out. Such is the tradeoff......

As you say, while the cash buffer is good at smoothing short term variation, over long periods of poor real returns and, hence, declining portfolio withdrawals, it will run out. The question is whether the outcome is then better or worse than not having had the buffer in the first place or using some other short-term income smoothing mechanism. 

I note that the last few decades are fairly untypical historically since, at least until two years ago, there were strong bond returns (as the high yields of the 1980s wound down) and a decade of strong equity returns (albeit after a more variable decade).

If returns are poor and the buffer runs out, it's very likely that you'll still be in a better position than not having had the buffer at all.
Of couse,  if returns are good then the reverse  will very likely be true........and it may well be the case that if returns are a bit so-so, then there may well be little difference either way....

For us, the risk of having to make deep cuts outweighs the potential for higher returns (which, while always nice, we don't really need as such).

Linton

OldScientist said:

MK62 said:

If you operate your cash buffer as a true buffer, rather than a "standby" pot, then the amount going in can vary each year, while the amount coming out remains relatively constant (in real terms).....with the level of cash in the buffer varying accordingly. This is what I, and I'm assuming Linton too, mean by decoupling income from spending. Obviously though, you can only operate for so long with less going in than coming out......so in good years you may be putting more in than comes out. Such is the tradeoff......

As you say, while the cash buffer is good at smoothing short term variation, over long periods of poor real returns and, hence, declining portfolio withdrawals, it will run out. The question is whether the outcome is then better or worse than not having had the buffer in the first place or using some other short-term income smoothing mechanism. 

I note that the last few decades are fairly untypical historically since, at least until two years ago, there were strong bond returns (as the high yields of the 1980s wound down) and a decade of strong equity returns (albeit after a more variable decade).

Obviously if your total expenditure continues to exceed your total gains over an extended period you will eventually run out of money.  You cannot avoid that no matter what strategy you use.

The key point however is SWR's are much lower than average long term returns would suggest should be possible because selling equity for cash when prices are low during crashes eats into the core investments that are needed for future long term growth..  By avoiding selling equity one's expenditure can approach the value that would be provided by average long term returns.