SWR Come What May

kempiejon

I was reminded last night that there's a book Beyond the 4% rule. I've not read it but did read about it. It promises to be more UK focused, is more flexible, uses variable withdrawal amounts and declining spending in later life.,  Seems one can get exchange a few bits of personal data for a free chapter form the author. https://finalytiq.co.uk/beyond-4-rule/
Did it make it to anyone's reading lists?

NoMore

[Deleted User] said:

NoMore said:

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. 

Ah, my example was not just to use 4% of the remaining pot each year but the higher of (i) last year's pension plus inflation, and (ii) 4% of this year's pot.  It's just a way of showing that the 4% SWR doesn't deal with everything.

Another example is to do it in reverse.  Imaging the pot for A was £150,000 so they took £6,000 in the first year and £6,600 for the next year (even though the pot fell to £100,000).  B retires one year later and their pot is £100,000 but the 4% SWR says to take £4,000. 

In my made up example, both are the same age and have the same size pot.  But they are allowed to draw hugely different amounts per the 4% SWR "rule".

Yes, but I don't really know what your getting at, if you follow the SWR that's how it works, if you don't then that's a different withdrawal method.

Again I am not saying the SWR is correct and should be used. Just detailing the methodology.

Sea_Shell

[Deleted User] said:

Sea_Shell said:

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

Bank of England says £15,900 in 2019 is £19,798.20 in August 2024 - https://www.bankofengland.co.uk/monetary-policy/inflation/inflation-calculator

May be you should go wild and blow the extra £1.80 per year? 

This just uses "2019" and you can get more "precise" by looking at the tables on a month-by-month basis.  But it's pretty pointless as there are different definitions of inflations (e.g. using RPI it is £21,251 - https://www.hl.co.uk/tools/calculators/inflation-calculator)

So, the plan is working...so far😉

Linton

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?

FIREDreamer

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?

Me! A joint life RPI annuity purchase - job done!

MK62

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?

Agreed.......an "academic" strategy might be the basis, but I suspect most people will modify to fit their own circumstances and portfolio.

Sarahspangles

Linton said:

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?

My background is projects not finance but a lot of the detailed plans look like ‘procrastiplanning’ to me. In project terms, this can prevent a project from ever starting.

There are always some unknowns, in return there has to be some tolerance of risk. The quality of what is achieved may need to be scaled back, unless there is unlimited budget. The other useful project concept is the planning horizon, the period over which detailed planning is worthwhile before a review and reset.

The problem with procrastiplanning for retirement is that time doesn’t pause. We don’t know how long we will be retired, but we do know that remaining time is shortening.

kempiejon

The problem with procrastiplanning for retirement is that time doesn’t pause. We don’t know how long we will be retired, but we do know that remaining time is shortening.

I know I stayed at work in 2018 and 2019 mostly because there was a chance of my department review offering some redundancies. I didn't hate work, I was checking my funds would support me while sticking as much as I could in my pension for a couple of years. My plan was leave in April 2020. I was lucky not to have pulled the trigger when covid hit. I was also lucky enough for my job to be safe so on full pay I had very little to do during all the lockdowns and restrictions except some DIY and gardening. But pre-covid I was very aware in 2018/19 that I suffered from one more year syndrome, wanting a little bit more in the pot, bloody lucky I did.

I agree with the statement copied from @Sarahspangles Wanna be retirees need to know they can pull the trigger and have the courage to do so.

GazzaBloom

Sarahspangles said:

Linton said:

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?

My background is projects not finance but a lot of the detailed plans look like ‘procrastiplanning’ to me. In project terms, this can prevent a project from ever starting.

There are always some unknowns, in return there has to be some tolerance of risk. The quality of what is achieved may need to be scaled back, unless there is unlimited budget. The other useful project concept is the planning horizon, the period over which detailed planning is worthwhile before a review and reset.

The problem with procrastiplanning for retirement is that time doesn’t pause. We don’t know how long we will be retired, but we do know that remaining time is shortening.

Well said. The doomsters and gloomsters will forever be warning you of "what about this" and "what about that" all day long. With an invested retirement portfolio, at some point you have to take the leap into the future or you would work until you drop or just take an annuity.

if you want the prospect of increased wealth through retirement you need to take some risk. If things don't go as well as hoped, adjustments can and will be made.

One major risk is fretting away, being overly cautious, then dying short of your hoped for longevity leaving someone else to spend your money. We all cross roads, drive on motorways and fly through the skies in tin tubes filled with jet fuel. Life is "risk on".

GazzaBloom

Linton said:

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?

I retire in December and that's pretty much how I see things. 4 years worth of living expenses held in cash earning BOE base rate (inside pension) and the rest in the wind subject to the whims of the markets.

My pre-retirement plan is based on 5% Guyton's guardrails with annual rebalancing, which shows success against historical returns and has given me the confidence to retire but will I follow it to the letter? Unlikely. I will take each year as it comes and adjust my life according to whatever the future road has in store.

The prospect of that sure seems more exciting and potentially rewarding than another 3-4 years trudging on this tedious subservient employee treadmill and daily 65 mile round trip commute.