SWR Come What May

Sea_Shell

Hoenir said:

Sea_Shell said:

We now have £100k+ more than we started with 😇

We've experienced an era of free/cheap money. Going to be a price to pay. 

By who?  And when?

kempiejon

I have a good history of my investments to look back on and 4% looks to have been affordable most of that time. Not Covid times. I've done my sums and I want to take roughly 3.5-3.75%. That should let me look again at my investments every few years and see if I can take a pay rise or at least take a bonus. As my income will come from my investments for a while I'll need to cut my coat accordingly; there might be down years when I might chose to take less but I also am building a buffer of a couple of years of spending to smooth out some hiccups.

Hoenir

Sea_Shell said:

Hoenir said:

Sea_Shell said:

We now have £100k+ more than we started with 😇

We've experienced an era of free/cheap money. Going to be a price to pay. 

By who?  And when?

Welcome to the real world of investing. It's a rollercoaster ride in the dark. Post GFC fiscal policy is well documented. Markets aren't the real economy. At times they become detached. Reversion to the mean is an unavoidable force. 

NoMore

kempiejon said:

I have a good history of my investments to look back on and 4% looks to have been affordable most of that time. Not Covid times. I've done my sums and I want to take roughly 3.5-3.75%. That should let me look again at my investments every few years and see if I can take a pay rise or at least take a bonus. As my income will come from my investments for a while I'll need to cut my coat accordingly; there might be down years when I might chose to take less but I also am building a buffer of a couple of years of spending to smooth out some hiccups.

How are you determining it wouldn't be affordable during covid times ? The usual definition of SWR is that it would be successful over any 30 year historical period, as we haven't had 30 years of data since covid, I'm not sure how you come to your conclusion, especially as its usually early big drops that cause more trouble than ones later in the 30 year period. As you can only have data where covid was late in any 30 year period, I can't see how you can blame covid for a failure.

kempiejon

@NoMore yes I was being very shortermist in my view on 4% sustainable. I feel such a fool now as we all know what 4%SWR really means.
The year before covid my dividend income was just below what I needed to fund my retirement, the following year its income halved, I had a significant portion of portfolio value fall too. If I have been withdrawing any amount calculated as 4% in previous years and uplifted by inflation I would have been extracting all the dividend income from the portfolio and capital just to top the income up. This method eats into capital, selling at historic lows so mightn't be sustainable.
You are right it's a 30 year test. As it turns out by investing and holding on the portfolio recovered as I wasn't using the investments to live off. I would not think reducing portfolio value a sustainable system in practice would have to reduce income, get a job or I'll make other plans. Glad I didn;t start the year before Covid as per my original plan.

NoMore

The problem is covid could be a problem for SWR but we won't know for a long time, so anybody starting say in 2016 onwards could already have a failing SWR, they just don't know it yet.

This is the fundamental problem with SWR, its all based on historical periods and everyone of those is different and you can be certain the future is unknown and will be different as well. Problem is I don't think anybody can solve this as its just unsolvable, too many unknowns, gains, inflation, death to name the biggest 3.

I agree with those who say the SWR is a good indicator as to whether you are ready to start drawdown but that's about it. The problem is I don't know what to use instead. I'm lucky that I will have a DB pension that will cover more than my needs, with my DC pot just required for discretionary spend, such that I am not too worried about how much to spend (if any) from my investments. For those with no guaranteed income sources, I would probably be looking at least getting a baseline of something via annuity.  Unless your portfolio is of such a size that your withdrawals are insignificant.

OldScientist

While it would appear that there is some agreement on these boards (or at least in this thread!) that RPI annuities make a lot of sense, it is still the case that only 10% of pensions accessed for the first time end up in annuity purchase (e.g., see https://www.fca.org.uk/data/retirement-income-market-data-2023-24/interactive-analysis), while escalating annuities (which I think includes RPI as well as fixed escalations) only form 19% of those purchased.

However, except in the unlikely event that someone has used their entire pension pot on an annuity purchase, there may still be an element of drawdown in which case (as per the topic) SWR is a possible approach, but not, in my view, a sensible one because, amongst other reasons, while the amount of real income is known, the amount of time it will last is not.

SouthCoastBoy

The problem with dc pensions is the unknown, I think the swr is useful to give people a rough guide to the size of pot needed. It gives some context to the vast amount of money needed to ensure you can live comfortably in retirement.

NoMore

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. 

jim8888

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 !