Growth assumptions in your models/spreadsheets

westv

Hoenir said:

QrizB said:

michaels said:

2) I certainly think there is room for an annuity when rates exceed historic SWR (or whatever other 'worst case return scenario you use in your modelling)...

The UK SWR is something like 3.5% but a single-life RPI annuity is yielding something like 4.8% for a 65-year-old retiree.

SWR isn't guaranted to track inflation though. There's no direct correlation between equity returns and inflation over any given period of time. . 

The whole point of the SWR is to provide an income that matches inflation.

Hoenir

westv said:

Hoenir said:

QrizB said:

michaels said:

2) I certainly think there is room for an annuity when rates exceed historic SWR (or whatever other 'worst case return scenario you use in your modelling)...

The UK SWR is something like 3.5% but a single-life RPI annuity is yielding something like 4.8% for a 65-year-old retiree.

SWR isn't guaranted to track inflation though. There's no direct correlation between equity returns and inflation over any given period of time. . 

The whole point of the SWR is to provide an income that matches inflation.

SWR would have to have rules applied in that case. Drawn income levels would have to be flexible. 

NoMore

Hoenir said:

westv said:

Hoenir said:

QrizB said:

michaels said:

2) I certainly think there is room for an annuity when rates exceed historic SWR (or whatever other 'worst case return scenario you use in your modelling)...

The UK SWR is something like 3.5% but a single-life RPI annuity is yielding something like 4.8% for a 65-year-old retiree.

SWR isn't guaranted to track inflation though. There's no direct correlation between equity returns and inflation over any given period of time. . 

The whole point of the SWR is to provide an income that matches inflation.

SWR would have to have rules applied in that case. Drawn income levels would have to be flexible. 

You don't appear to understand how the SWR works. Its not a % amount of the remaining pot each year. That would result in a variable income dependant on investment return. Its at the start you take the SWR of your initial pot and then increase that £ amount each year by inflation. The initial percentage of pot is only used at the start. Its designed to give you the same income, increasing by inflation each year, no matter what investment returns will be, based on historic returns.

The reason people don't tend to follow it religiously, is it could take a lot of nerve to continue to take what could be a large percentage of your pot when the investment is not performing. 

I'm not advocating it as a strategy, just explaining how it actually works.

OldScientist

michaels said:

I find that final chart a really useful visualisation (just checking my understanding, that is the pale blue line of chart 1 plus 0%/2%/4%?)

You're correct...

SimonSeys

NoMore said:

Hoenir said:

westv said:

Hoenir said:

QrizB said:

michaels said:

2) I certainly think there is room for an annuity when rates exceed historic SWR (or whatever other 'worst case return scenario you use in your modelling)...

The UK SWR is something like 3.5% but a single-life RPI annuity is yielding something like 4.8% for a 65-year-old retiree.

SWR isn't guaranted to track inflation though. There's no direct correlation between equity returns and inflation over any given period of time. . 

The whole point of the SWR is to provide an income that matches inflation.

SWR would have to have rules applied in that case. Drawn income levels would have to be flexible. 

You don't appear to understand how the SWR works. Its not a % amount of the remaining pot each year. That would result in a variable income dependant on investment return. Its at the start you take the SWR of your initial pot and then increase that £ amount each year by inflation. The initial percentage of pot is only used at the start. Its designed to give you the same income, increasing by inflation each year, no matter what investment returns will be, based on historic returns.

The reason people don't tend to follow it religiously, is it could take a lot of nerve to continue to take what could be a large percentage of your pot when the investment is not performing. 

I'm not advocating it as a strategy, just explaining how it actually works.

Doesn’t that mean that SWR is time dependent?  I’d the SWR for someone aged 50 is different to someone aged 80

michaels

SimonSeys said:

NoMore said:

Hoenir said:

westv said:

Hoenir said:

QrizB said:

michaels said:

2) I certainly think there is room for an annuity when rates exceed historic SWR (or whatever other 'worst case return scenario you use in your modelling)...

The UK SWR is something like 3.5% but a single-life RPI annuity is yielding something like 4.8% for a 65-year-old retiree.

SWR isn't guaranted to track inflation though. There's no direct correlation between equity returns and inflation over any given period of time. . 

The whole point of the SWR is to provide an income that matches inflation.

SWR would have to have rules applied in that case. Drawn income levels would have to be flexible. 

You don't appear to understand how the SWR works. Its not a % amount of the remaining pot each year. That would result in a variable income dependant on investment return. Its at the start you take the SWR of your initial pot and then increase that £ amount each year by inflation. The initial percentage of pot is only used at the start. Its designed to give you the same income, increasing by inflation each year, no matter what investment returns will be, based on historic returns.

The reason people don't tend to follow it religiously, is it could take a lot of nerve to continue to take what could be a large percentage of your pot when the investment is not performing. 

I'm not advocating it as a strategy, just explaining how it actually works.

Doesn’t that mean that SWR is time dependent?  I’d the SWR for someone aged 50 is different to someone aged 80

Yes, an SWR is a real terms annual amount (expressed as a proportion of the initial pot) for 'zero historic failures' over a given number of years.  Generally 30 years is quoted although of course many of us would be looking at non-zero odds of a 40 year plus retirement - however as the number of years increases the SWR tends to converge to a fixed value (about 3%) rather than continuing to decline.

OldScientist

michaels said:

SimonSeys said:

NoMore said:

Hoenir said:

westv said:

Hoenir said:

QrizB said:

michaels said:

2) I certainly think there is room for an annuity when rates exceed historic SWR (or whatever other 'worst case return scenario you use in your modelling)...

The UK SWR is something like 3.5% but a single-life RPI annuity is yielding something like 4.8% for a 65-year-old retiree.

SWR isn't guaranted to track inflation though. There's no direct correlation between equity returns and inflation over any given period of time. . 

The whole point of the SWR is to provide an income that matches inflation.

SWR would have to have rules applied in that case. Drawn income levels would have to be flexible. 

You don't appear to understand how the SWR works. Its not a % amount of the remaining pot each year. That would result in a variable income dependant on investment return. Its at the start you take the SWR of your initial pot and then increase that £ amount each year by inflation. The initial percentage of pot is only used at the start. Its designed to give you the same income, increasing by inflation each year, no matter what investment returns will be, based on historic returns.

The reason people don't tend to follow it religiously, is it could take a lot of nerve to continue to take what could be a large percentage of your pot when the investment is not performing. 

I'm not advocating it as a strategy, just explaining how it actually works.

Doesn’t that mean that SWR is time dependent?  I’d the SWR for someone aged 50 is different to someone aged 80

Yes, an SWR is a real terms annual amount (expressed as a proportion of the initial pot) for 'zero historic failures' over a given number of years.  Generally 30 years is quoted although of course many of us would be looking at non-zero odds of a 40 year plus retirement - however as the number of years increases the SWR tends to converge to a fixed value (about 3%) rather than continuing to decline.

Just to add some data...

Using the calculator at https://www.2020financial.co.uk/pension-drawdown-calculator/ with a 60/20/20 (Uk equities/long bonds/cash) portfolio the safemax (i.e., the SWR where no failures occurred) was

Expected length of retirement at retirement

50    40    30    20

2.6   2.8   3.3   4.1

Assuming a longevity to 100yo (for a couple there is about a 10% chance of one or other or both living that long) then these would be for a retirement at ages 50, 60, 70, or 80.

MK62

OldScientist said:

michaels said:

SimonSeys said:

NoMore said:

Hoenir said:

westv said:

Hoenir said:

QrizB said:

michaels said:

2) I certainly think there is room for an annuity when rates exceed historic SWR (or whatever other 'worst case return scenario you use in your modelling)...

The UK SWR is something like 3.5% but a single-life RPI annuity is yielding something like 4.8% for a 65-year-old retiree.

SWR isn't guaranted to track inflation though. There's no direct correlation between equity returns and inflation over any given period of time. . 

The whole point of the SWR is to provide an income that matches inflation.

SWR would have to have rules applied in that case. Drawn income levels would have to be flexible. 

You don't appear to understand how the SWR works. Its not a % amount of the remaining pot each year. That would result in a variable income dependant on investment return. Its at the start you take the SWR of your initial pot and then increase that £ amount each year by inflation. The initial percentage of pot is only used at the start. Its designed to give you the same income, increasing by inflation each year, no matter what investment returns will be, based on historic returns.

The reason people don't tend to follow it religiously, is it could take a lot of nerve to continue to take what could be a large percentage of your pot when the investment is not performing. 

I'm not advocating it as a strategy, just explaining how it actually works.

Doesn’t that mean that SWR is time dependent?  I’d the SWR for someone aged 50 is different to someone aged 80

Yes, an SWR is a real terms annual amount (expressed as a proportion of the initial pot) for 'zero historic failures' over a given number of years.  Generally 30 years is quoted although of course many of us would be looking at non-zero odds of a 40 year plus retirement - however as the number of years increases the SWR tends to converge to a fixed value (about 3%) rather than continuing to decline.

Just to add some data...

Using the calculator at https://www.2020financial.co.uk/pension-drawdown-calculator/ with a 60/20/20 (Uk equities/long bonds/cash) portfolio the safemax (i.e., the SWR where no failures occurred) was

Expected length of retirement at retirement

50    40    30    20

2.6   2.8   3.3   4.1

Assuming a longevity to 100yo (for a couple there is about a 10% chance of one or other or both living that long) then these would be for a retirement at ages 50, 60, 70, or 80.

Interestingly, the calculator also says the safemax at 60/40 equities/cash (ie no bonds) was 

Retirement length
50       40      30      20

2.56   3.11   3.66   4.51

For comparison, 100% cash shows a 30y safemax of 2.82%, and 100% equities, 3.43% and 100% bonds, 1.49%

QrizB

I was just looking at the 100% equities case on that site myself. Seems that fortune favours the brave

Hoenir

NoMore said:

Hoenir said:

westv said:

Hoenir said:

QrizB said:

michaels said:

2) I certainly think there is room for an annuity when rates exceed historic SWR (or whatever other 'worst case return scenario you use in your modelling)...

The UK SWR is something like 3.5% but a single-life RPI annuity is yielding something like 4.8% for a 65-year-old retiree.

SWR isn't guaranted to track inflation though. There's no direct correlation between equity returns and inflation over any given period of time. . 

The whole point of the SWR is to provide an income that matches inflation.

SWR would have to have rules applied in that case. Drawn income levels would have to be flexible. 

You don't appear to understand how the SWR works. Its not a % amount of the remaining pot each year. That would result in a variable income dependant on investment return. Its at the start you take the SWR of your initial pot and then increase that £ amount each year by inflation. The initial percentage of pot is only used at the start. Its designed to give you the same income, increasing by inflation each year, no matter what investment returns will be, based on historic returns.

Unsurprisingly this topc is an old chesnut.  Where the same fallacies arise time over time.  Be wonderfull if (a) investments did in fact provide an inflation linked return (b) there was a direct correlation between inflation and investment returns. The rules that accompanied the US research on SWR are well documented.