SWR Come What May

MK62

Itsme01x said:

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'

There is.......some of the 30yr periods would have left you with more money at the end than you started with........but in reality what that model is saying is that for the US market over the period under consideration, 4% was safe........what it cannot say, with any degree of certainty, is that it will be safe in the future.

MK62

Well, the first retiree only has 29 years left of his plan, while the new retiree has 30 years......but you are right that its an anomoly.....however this is common among all withdrawal plans, not just SWR.

OldScientist

NoMore said:

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)

Happy to oblige

Pfau's paper (which is AFAIK, the first one to have dealt with non-US rates - note that in the first two links, he used the somewhat unrealistic 'perfect foresight' assumption which means that the SWR values are as optimistic as they can be) https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1699526
https://retirementresearcher.com/4-rule-work-around-world/
https://www.advisorperspectives.com/articles/2014/03/04/does-international-diversification-improve-safe-withdrawal-rates (only a fixed allocation of 50/50 is used)

Estrada (which is very comprehensive) https://blog.iese.edu/jestrada/files/2018/03/MaxWR.pdf

Sea_Shell

The other aspect of this is the temptation to "recalculate" your starting figure, and ask oneself that "what if I were retiring today?"   

We started out with £530k, which at 3% gives £15,900.    

As of today, 5 years later, our 3% would amount to £19,800

Our actual average annual spends over this period came in at £15,700  (believe me, it was!! - but lets not debate that here! )

Using actual inflation figures, how does that £15,900 and £19,800 compare, using the "rules"?   

NoMore

You could make that argument every year, and then you've just changed it to percentage of the remaining pot each year not the SWR. Taking only SWR% + inflation out every year, gives you regular predictable withdrawal. Taking higher during higher gains, prevents the protection that provides when losses occur. That's the theory anyway.

The reason, as I understand it is your choosing one particular instance where the second year for person A has a large increase, The SWR is based at looking at all 30 year historical periods as a whole and assessing it at the end of them, not based on the starting year(s). Some of those 30 year periods, a large increase in the second year may be followed by years of low gains  or losses whereby individual A (and possibly B as well) would have run out of money by taking that larger initial withdrawal. As I repeatedly state, its all historical and may in no way match to any future sequence of gains/losses.

I don't want to seem like I support the SWR as an actual withdrawal method, I don't , merely as a good indicator as whether you are ready to start drawdown.

MK62

...though 5 years later, you'd be calculating for 25 years rather than the original 30, so your "SWR" might be quite a bit higher still than £19800.....

Audaxer

[Deleted User] 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.

Let's pretend 4% is the right number.  What if you did the higher of (i) 4% plus inflation, or (ii) 4% of the pot at the end of the year?   Why isn't that in the 4% SWR rather than just 4% plus inflation.

So assume first year inflation is 10% and individual A's pot was £100,000 on retirement.  At the end of the first year it has gone up to £150,000.  Under the 4% SWR and individual can withdraw £4,000 in the first year and £4,400 in the second.

Individual B, who is the same age as A, retires a year later (at the end of the first year) with a pot of £150,000 and so the 4% SWR says they can withdraw £6,000.

So at the end of the first year, at exactly the same time, both are retired and both have a pot of £150,000.  The 4% SWR says that A can withdraw £4,400 and B can withdraw £6,000.   How does that make sense? So why can't A also withdraw £6,000 and it still be ok (based on the underlying analysis done to make up the SWR)?

That is an interesting scenario, My thoughts would be:

If Individual A had planned for his/her pot to be £100k at retirement, £4k per year plus inflation is probably sufficient income and they should stick to that, even although the pot has risen substantially by the end of the year. They could effectively restart their plan and take £6k per year if they really needed the extra income, but the balance could easily drop again to £100k by the end of Year 3 or 4.

In the case of Individual B, they could start at £6k per year based on the portfolio balance, but as it has unexpectantly risen by 50% just before retirement, maybe they wouldn't have planned for £6k per year spending. If I was Individual B and was only planning to spend £4k plus inflation per year based on around £100k, I think I would stick to that despite my balance having risen to £150k.

 

Cus

I've used ficalc.app.  Its very good at giving you lots of options on how to withdraw your money. You can keep adjusting until you stumble across a withdrawal strategy you feel reassured by, that claims you'll be ok in the future. In reality it's guesswork.😁

kempiejon

Cus said:

I've used ficalc.app.  Its very good at giving you lots of options on how to withdraw your money. You can keep adjusting until you stumble across a withdrawal strategy you feel reassured by, that claims you'll be ok in the future. In reality it's guesswork.😁

There's a reason they call it Monte Carlo simulation.

OldScientist

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.