SWR Come What May

Audaxer

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. 

Exactly. When I've seen spreadsheet calculations looking at a SWR over a 30 year period, it's always 4% (or 3.5%) of spend of the initial portfolio balance, and it's that spend figure you adjust for inflation each year. The portfolio balance will obviously also be affected by the rate of return, but I don't think you should adjust the portfolio balance for inflation as well as the spend figure.

NoMore

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.

Stubod

If you take 4%, (or a more cautious 3%), is it assumed that you will still have any money left, ot just that the end "pot" will retain it's original amount?? 

Bobziz

Hoenir said:

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. 

So are you largely in cash then given how far from the mean US markets are, and the fact that when the US sneezes other markets catch a cold ? Conscious you spend a lot of time researching smaller companies, but even those will be impacted by a US market reverting to the mean.

NoMore

Stubod said:

If you take 4%, (or a more cautious 3%), is it assumed that you will still have any money left, ot just that the end "pot" will retain it's original amount?? 

SWR looks at historically returns and determines what would be the largest withdrawal you could have made and not run out of money (ie pot remains greater than zero) even then I think its considered a success for 95% of scenarios to not run out of money. 

For most 30 year periods you actually end up with a larger pot than you started with. Again this is all on historical data. However you don't know what your future returns will be so there's nothing to say that you get a horrible next 30 years and run out of money early despite historically it never having happened previously. Or you get fantastic returns and at the end realise you could have took a 15% SWR and still had a large inheritance to hand over.

Audaxer

Stubod said:

If you take 4%, (or a more cautious 3%), is it assumed that you will still have any money left, ot just that the end "pot" will retain it's original amount?? 

It mainly depends on the returns of your pot over a 30 year period, and particularly the sequence of these returns. If for example you have really poor investment performance over the first 10 years, then you could possibly run out of money before the end of the 30 years, especially if there is also high inflation and you need to increase your withdrawals accordingly.  However if you have a good sequence of returns you could end up with more than you started with. Obviously with a more cautious 3% withdrawal rate you are less likely to run out of money.

NoMore

If people are interested here's the links to both the original paper by Bill Bengen (who invented the SWR rule) and the Trinity Study which confirmed and took it further. These look at it from an American point of view and is why you often hear people say that for the UK you should use a lower SWR, however I'm not sure if their is a definitive study for this ( @OldScientist you might have a source ?)

Bill Bengen's paper - FPA Journal - The Best of 25 Years: Determining Withdrawal Rates Using Historical Data (financialplanningassociation.org)

The Trinity Study - (PDF) Sustainable withdrawal rates from your retirement portfolio (researchgate.net)

Itsme01x

following on from what @NoMore comments,  at the end of 30 years the model says you have no more money left in the pot, ie it has not run out over the 30 year period.  However, life says there are many variables and potentially a large spread.  The model is 4% - US market over 30 years is a 'safe bet'

NoMore

Since the choice of a withdrawal rate involves individual preference for current consumption, uncertainty of life expectancy, and variable financial needs, there is no single globally optimal withdrawal rate. Each investor must determine the appropriate balance of the risk of running out of funds versus a higher, more enjoyable standard of living early in retirement. Most authors tend to favor a more conservative approach that virtually guarantees a substantial positive terminal value of the retirement portfolio. Such an approach exchanges post-retirement quality of life for end of life financial security. Some retirees may prefer not to make that tradeoff. In the final analysis the choice of a portfolio withdrawal rate, within a reasonable range, requires very personal choices that perhaps are beyond the scope of financial analysis.

A very pertinent quote from the Trinity Study conclusions that seems to have been ignored by everyone who talks about a 4% SWR! (Bolding in quote is mine)

Hoenir

Bobziz said:

Hoenir said:

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. 

So are you largely in cash then given how far from the mean US markets are, and the fact that when the US sneezes other markets catch a cold ? Conscious you spend a lot of time researching smaller companies, but even those will be impacted by a US market reverting to the mean.

I've recently been switching from short dated to long dated UK Gilts.   With the bigger macro picture being so uncertain. Equity wise I've been fairly static.