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  • FIRST POST
    • michaels
    • By michaels 17th May 19, 11:13 PM
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    michaels
    SWR start point and market value on retirement
    • #1
    • 17th May 19, 11:13 PM
    SWR start point and market value on retirement 17th May 19 at 11:13 PM
    So I imagine stock markets as following a slight upward line over time with lots of peaks and trough noise either side of the trend line.

    If this is reasonable as a model then does that mean on retirement rather than taking say 4% of your ppt value on retirement you should take 4% of the trend fit line at that point. Eg if the market is 10% above trend then your starting withdrawal rate for whichever model you use should be based on a pot 10% smaller and vice versa if the market is below long term trend.

    Are there any papers discussing this sort of approach to drawdown?

    Thanks
    Cool heads and compromise
Page 2
    • Prism
    • By Prism 18th May 19, 2:29 PM
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    Prism
    As I see it, I have spent most of my working life with variable income so I feel I am in a good place to start retirement following the same path. All I will need to select is a year 1 withdrawal rate (based on CAPE or similar) and then adapt from there year by year
    • seacaitch
    • By seacaitch 18th May 19, 2:31 PM
    • 163 Posts
    • 302 Thanks
    seacaitch
    So I imagine stock markets as following a slight upward line over time with lots of peaks and trough noise either side of the trend line.

    If this is reasonable as a model then does that mean on retirement rather than taking say 4% of your ppt value on retirement you should take 4% of the trend fit line at that point.
    Originally posted by michaels
    Linking your withdrawals to economic fundamentals such as corporate earnings, which are much less volatile than equity valuations, is a valid and sensible option for mitigating sequence risk in the first half of a retirement if that period coincides with high valuations.

    jamesd mentions (with links) to using Shiller CAPE; here's some further details on this approach, which is worth a read:

    Flexibility and the Mechanics of CAPE-Based Rules

    https://earlyretirementnow.com/2017/08/30/the-ultimate-guide-to-safe-withdrawal-rates-part-18-flexibility-cape-based-rules/

    Compared to some of the alternatives, this method is likely to deliver less volatility in annual drawdowns, which I see as a good objective, but achieves this by ensuring that drawdowns in periods of high valuation are appropriately conservative (low).

    The approach I take is loosely informed by this method.
    • MK62
    • By MK62 18th May 19, 2:39 PM
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    MK62
    I just re-assess everything on an annual basis and take it from there.......I keep a cash buffer so whatever happens, the proverbial won't hit the fan immediately, and I have a reasonable idea of where my "pot" needs to be to support various levels of withdrawal at different ages.


    Living beyond 90 could be a bit inconvenient though........
  • jamesd
    May 2008 was a different era. Some rather major financial events happened shortly afterwards and have continued since. ... Then there's the fundamentals such as p/e ratios etc to be considered as well.
    Originally posted by Thrugelmir
    The data is entirely US centric that's my point. You appear to be trying to find evidence to substantiate a view. Rather than maintaining an open mind.
    Originally posted by Thrugelmir
    The research covers around a hundred years and the correlation has been found to apply to every major equity market.

    Cyclically adjusted P/E are the driver of the correlation, not something extra.
    Last edited by jamesd; 18-05-2019 at 11:16 PM.
  • jamesd
    IBy that metric markets are currently very high. The models also show 60:40 equity bonds as producing the highest swrs. As you point out real bond returns are now much lower than historically (perhaps for the reasons in my next paragraph) so this alone would put a drag on any future swr.
    Originally posted by michaels
    Not all equity markets are at high cyclically adjusted P/E but the US tends to be quite significant and is.

    Bengen and others have observed that for periods longer than 30 years more equities is better, the converse for shorter times.

    Real bond returns have in the past been lower than now. For the US it was observed that at times of low rates Treasury Bills (money market equivalent) beat bonds.
    • DT2001
    • By DT2001 18th May 19, 11:16 PM
    • 103 Posts
    • 108 Thanks
    DT2001
    I just re-assess everything on an annual basis and take it from there.......I keep a cash buffer so whatever happens, the proverbial won't hit the fan immediately, and I have a reasonable idea of where my "pot" needs to be to support various levels of withdrawal at different ages.


    Living beyond 90 could be a bit inconvenient though........
    Originally posted by MK62
    I agree with your plan, in theory, as we are yet to retire. Seashell and Linton have both advocated a flexible approach. Iíve dealt with variable income for the last 20+ years of self employment so I have the mindset that maybe some employees do not. 2 questions, do you top up your cash fund in good years so you always have a predetermined figure and are you actually missing out on better than inflation returns by holding larger amounts of cash (presuming you do) that would give a better long term return?
    • Thrugelmir
    • By Thrugelmir 18th May 19, 11:34 PM
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    Thrugelmir
    The research covers around a hundred years and the correlation has been found to apply to every major equity market.
    Originally posted by jamesd
    Including China?

    Or India?

    The world is a very different place to that of just 30 years ago.
    Last edited by Thrugelmir; 19-05-2019 at 12:01 AM.
    "'The mistakes we make as investors is when the market's going up, we think it's going to go up forever. When the market goes down, we think it's going to go down forever. Neither of those things actually happen. Doesn't do anything forever. It's by the moment.'" - John Bogle
    • Linton
    • By Linton 19th May 19, 5:34 AM
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    Linton
    Not all equity markets are at high cyclically adjusted P/E but the US tends to be quite significant and is.

    Bengen and others have observed that for periods longer than 30 years more equities is better, the converse for shorter times.

    Real bond returns have in the past been lower than now. For the US it was observed that at times of low rates Treasury Bills (money market equivalent) beat bonds.
    Originally posted by jamesd
    With globalisation over the past 20 years I find it difficult to see how different geographical markets can have very different cyclically adjusted P/Es. Since shares can easily be traded across the world and it would seem that in most of the worlds stock exchanges more than half of all holdings are owned by foreign investors. No rational foreign investor is going to pay more for a global oil company primarily traded on say the French stock exchange than they would pay for an equivalent company traded in New York.

    One can argue that neither of the recent major crashes which affected all exchanges across the world arose from general market conditions of the type that would be driven by general cyclic P/E considerations. The .com crash was a large but simple bubble in a small part of the market arising from technology change and the 2008 crash was the result of ill-judged lending that compromised the global banking system. In both cases the markets recovered to previous valuations pretty quickly.

    As regards bonds, ISTM that the issue is not the real rate of return but rather that capital values are close to the point at which the cash returns become negative. Although to a rational investor this may not be as significant as the real returns, it is very significant psychologically. Another important factor is that most small investors use general bond funds rather than directly holding bonds with maturity dates that match their objectives. This makes short term capital values of greater importance than overall long term interest returns.

    For these reasons I would argue that the situation for small investors is different now to that in past and that the 100 years of data is only of limited relevance.
    • MK62
    • By MK62 19th May 19, 6:33 AM
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    MK62
    I agree with your plan, in theory, as we are yet to retire. Seashell and Linton have both advocated a flexible approach. I’ve dealt with variable income for the last 20+ years of self employment so I have the mindset that maybe some employees do not. 2 questions, do you top up your cash fund in good years so you always have a predetermined figure and are you actually missing out on better than inflation returns by holding larger amounts of cash (presuming you do) that would give a better long term return?
    Originally posted by DT2001
    Top up?.......well the "buffer" isn't really a seperate "pot" as such, and I haven't yet gone through a major downturn while retired, so at present it's going to plan and hasn't needed any topping up as such, beyond the annual withdrawals from pensions/S&S ISAs. However when that downturn comes and (hopefully) goes I will reassess things then and decide at the time.
    One issue is that topping up a cash buffer from a pension means paying 20% tax upfront on the extra withdrawal......a bit self-defeating imho, so if it happens it would be from S&S ISAs.
    There is no real predetermined figure tbh, beyond the fact that at it's peak it might be around 2-2.5 years worth of current income and will vary through the (tax) year to a minimum 1-1.5 years worth (if things went really badly in the markets though that "current income" would then be reduced, so it's all a bit fluid in that respect)

    As for missing out on returns by holding more cash....possibly (though it can work the other way too if markets go south) - it also depends on the level of cash we are talking about, as a percentage of the whole "pot".

    However, I accepted a while ago that, for me, it's not just about trying to maximise returns - there's also a defensive element involved, and that doesn't just stop at fund selection.
    Plus, tbh, I like the idea that whatever happens, I won't be forced into anything immediately (which to me, in investment terms, means within a year or two..)...I suppose it's my "comfort blanket"...

    There are quite a few ways to tackle income drawdown from investments, so you have to weigh them up and decide for yourself which fits best for your particular circumstances - there is no one-size-fits-all (though most will dance around the same tune of potentially variable income throughout retirement)
    • Sea Shell
    • By Sea Shell 19th May 19, 7:22 AM
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    Sea Shell
    Looking at our cash figures, they actually form about 18% of our overall pot, which is approx. 8 years of spending. Too much?? probably. Do we sleep soundly? Yes. That is all earning at least 1.5% interest.

    Once DH has access to his DC pensions (in 27 months time), we'll reassess again, and may just move forwards with, say, a 5 year buffer. But we'll continue to monitor things regularly.
    " That pound I saved yesterday, is a pound I don't have to earn tomorrow "
    • michaels
    • By michaels 19th May 19, 10:23 AM
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    michaels
    Looking at our cash figures, they actually form about 18% of our overall pot, which is approx. 8 years of spending. Too much?? probably. Do we sleep soundly? Yes. That is all earning at least 1.5% interest.

    Once DH has access to his DC pensions (in 27 months time), we'll reassess again, and may just move forwards with, say, a 5 year buffer. But we'll continue to monitor things regularly.
    Originally posted by Sea Shell
    So losing about 0.5% pa in real terms on the whole cash buffer rather than hopefully growing at 2% in real terms if it was the invested. Not saying it is the wrong thing to do but pretty costly over 30 years.....
    Cool heads and compromise
    • Sea Shell
    • By Sea Shell 19th May 19, 10:41 AM
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    Sea Shell
    I guess we'll all only know what the "right" decision was in hindsight.

    Take our mortgage for example. We made a point of paying it off early, 13 years ago. At the time there weren't the pension freedoms there are now, and our rate was nearly 6% so we prioritised that over pensions. However, everything's changed now and we'd probably do it differently, if we knew then what we know now.
    " That pound I saved yesterday, is a pound I don't have to earn tomorrow "
    • MK62
    • By MK62 19th May 19, 12:50 PM
    • 415 Posts
    • 306 Thanks
    MK62
    So losing about 0.5% pa in real terms on the whole cash buffer rather than hopefully growing at 2% in real terms if it was the invested.
    Originally posted by michaels
    The key word there being "hopefully".........
    Sometimes -0.5%pa in real terms is a good return.....
    • Prism
    • By Prism 19th May 19, 1:12 PM
    • 834 Posts
    • 650 Thanks
    Prism
    So losing about 0.5% pa in real terms on the whole cash buffer rather than hopefully growing at 2% in real terms if it was the invested. Not saying it is the wrong thing to do but pretty costly over 30 years.....
    Originally posted by michaels
    I think the best way of doing this with cash would be to have a series of fixed rate savers - assuming all 8 of those years are not needed at once. Should be easy enough to equal or slightly beat inflation doing that. I am planning of 5 years of cash and fixed savers and 5 years of fairly safe bond funds.
    • westv
    • By westv 19th May 19, 2:08 PM
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    westv
    Including China?

    Or India?

    The world is a very different place to that of just 30 years ago.
    Originally posted by Thrugelmir
    Aha! So, it's different this time.
    • Linton
    • By Linton 19th May 19, 2:09 PM
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    • 10,981 Thanks
    Linton
    So losing about 0.5% pa in real terms on the whole cash buffer rather than hopefully growing at 2% in real terms if it was the invested. Not saying it is the wrong thing to do but pretty costly over 30 years.....
    Originally posted by michaels

    Yes, but after 30 years most pensioners are dead.


    But its not just pensioners. In my view good investing means meeting your objectives, not maximising return. Given you can meet your objectives the second priority is doing so at minimum risk.
    • Sea Shell
    • By Sea Shell 19th May 19, 2:24 PM
    • 1,682 Posts
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    Sea Shell
    I think the best way of doing this with cash would be to have a series of fixed rate savers - assuming all 8 of those years are not needed at once. Should be easy enough to equal or slightly beat inflation doing that. I am planning of 5 years of cash and fixed savers and 5 years of fairly safe bond funds.
    Originally posted by Prism
    Exactly, some is at 5% (for a little while longer!!!), 3%, 2.5% etc. Some instant access, some in fixed term bonds.
    " That pound I saved yesterday, is a pound I don't have to earn tomorrow "
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