Investment returns for spreadsheet
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JoeEngland
Posts: 445 Forumite
I've read about the SWR suggested figure of 4%. When designing a financial plan spreadsheet what investment return do you use, average stock market increases over the last 20-30 years? At the moment I've got a spreadsheet based on some simple assumptions, and it doesn't have any long term gains or losses on stock market investments.
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I have modelled 4% return with 2.5%inflation.0
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My annual objective is 2% above inflation. Anything above this is a bonus. Market returns are unpredictable. If they weren't we would all be billionaires by now.0
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It can be a very complex set of calculations to work out a safe withdrawal rate. I bought a book called Living off your Money which comes with a spreadsheet to help calculate. It uses a long term history of the stock market (100 years +) for its starting point. The basic assumption with it is the SWR changes yearly based on previous performance.0
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I used 1% over inflation in my modelling, which broke down to an average of 2.5% inflation and so 3.5% total growth. The spreadsheet shows this a linear, but of course you could easily get a -50% year (or over 2 years) so you need to factor in some money held in cash, not least of which to buy new underwear!"For every complicated problem, there is always a simple, wrong answer"0
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Some good news and bad.
The 4% figure comes from a report by Bengen in 1994. It was based on masses of historical stock market data.
The premise is: model what would have happened if you had retired in every year from 1926 to the present. This includes several financial crashes. The 4% figure is the worst case (I.E. retiring just before a crash). The life expectancy is used is 30 years. It includes inflation - so you don't need to model it.
The method has been re-analyzed and validated with newer data. By Bengen and others.
The bad news: the analysis is US based. Several analysts have re-run for different countries and all are lower. For the UK I have seen numbers like 3.7% and even as low as 3.3%. Japan for example is much less.
Have a hunt for: Safe Withdrawal Rates for Retirees in the United Kingdom, Morningstar 2016.
You might want to have a play with this tool: it does what your spreadsheet might do: https://retirementplans.vanguard.com/VGApp/pe/pubeducation/calculators/RetirementNestEggCalc.jsf
There are others.
There is a lot on this subject on this forum, far more than you want to know. Search Safe Withdrawal Rate and SWR.0 -
Use scenario modelling to stress test your portfolio. I have built a spreadsheet that lets me model inflation, investment returns, interest on cash and various other things as parameters that can be changed each year. I model different levels of annual expenditure based on what we will actually need (growing in line with inflation) rather than using a set SWR.
My base scenario is that investments grow at 1% above inflation but I have also modelled higher growth and also various correction/crash scenarios in terms of investment returns (eg a 2008 style crash and recovery happening in the next 5 years).0 -
OldMusicGuy wrote: »Use scenario modelling to stress test your portfolio. I have built a spreadsheet that lets me model inflation, investment returns, interest on cash and various other things as parameters that can be changed each year. I model different levels of annual expenditure based on what we will actually need (growing in line with inflation) rather than using a set SWR.
My base scenario is that investments grow at 1% above inflation but I have also modelled higher growth and also various correction/crash scenarios in terms of investment returns (eg a 2008 style crash and recovery happening in the next 5 years).
Do you withdraw more when returns have been higher than average and less when they're below average? I'm wondering whether in a year when returns are particularly high does it make sense to withdraw more than planned and stick that in cash savings with as high an interest rate as possible?0 -
I have a different strategy (the famed "bucket" strategy). I already have enough cash to last at least 5 years, most likely a lot longer, without touching my investments. I do not use the concept of SWR. Instead, I model what we actually need to spend. The spreadsheet takes UFPLS up to from the DC pot up the personal allowance and then uses cash to fill the shortfall. For the next 5 years, my invested money is left untouched. Once I reach SP age (66) I probably won't need to touch the DC pot again for a while, it depends how fast I deplete other cash sources.JoeEngland wrote: »Do you withdraw more when returns have been higher than average and less when they're below average? I'm wondering whether in a year when returns are particularly high does it make sense to withdraw more than planned and stick that in cash savings with as high an interest rate as possible?0 -
I have used 4% real growth in the accumulation phase and will switch to 3.6% in retirement, to reflect the fact that the option of working longer to offset bad returns will no longer be available.
In addition, I have been marking to budgeted growth plus actual inflation in my plan each year rather than marking to market - so I have a fair amount of buffer built up by now between actual values and what's in my spreadsheet given recent returns. (If we had had prolonged returns below plan I had intended to mark to market after 2 years)
In retirement I have a bridging bucket to backfill for DB and SP that I assume just gets 0% real. My long term drawdown bucket assumes 3.6% real and I plan to draw 3.6% of actual each year.0
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