SWR start point and market value on retirement

michaels · 18 May 2019 at 12:13AM

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

Marcon · 18 May 2019 at 12:53AM

michaels wrote: »

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

No because it isn't really a feasible or sensible approach to take, given the unpredictable nature of the markets (especially in recent years) - and of course much depends on where your funds are invested.

jamesd · 18 May 2019 at 2:25AM

michaels wrote: »

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?

Yes, to a degree, though you have it somewhat the wrong way around. The SWR is based on the worst case so if you see that markets are in good shape - down! - you can expect a higher withdrawal percentage to work. Three sets of writing to consider are:

1. Guyton's sequence of returns risk taming approach, which varies asset allocation based on the cyclically adjusted price/earnings ratio.
2. Kitces work explaining the high inverse correlation between cyclically adjusted P/E and ten year returns, some at the 1 link. Also Shiller CAPE Market Valuation: Terrible For Market Timing, But Valuable For Long-Term Retirement Planning and Resolving the Paradox - Is the Safe Withdrawal Rate Sometimes Too Safe? He observed that Shiller CAEP (E/P not P/E) had a high 0.77 correlation with the 30 year SWR.
3. Wade Pfau has also done work in this area and his US dashboard may be interesting. Scroll down to (2) the penultimate table for the summary. The aggressive column seems the one that best matches traditional SWR calculations.

These pieces of work, notably 1, are a large part of why I currently suggest considering lower equity or lower US percentage in the first post of Drawdown: safe withdrawal rates.

MK62 · 18 May 2019 at 7:24AM

michaels wrote: »

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.

As your topic title is about "Safe Withdrawal Rate", then assuming your pot is smaller than it actually is (if the markets are above this trend line) could be seen as building in some safety margin, if the resulting size of withdrawal is still viable for you.

However, assuming your pot is bigger than it actually is (if the markets are below this trend line) could equally be seen as building in a "danger" margin, and exposing you to higher sequence of return risk right at the start, exactly when you don't want it. The markets could take years to recover back to the trend line, and even then it may only be because the lower markets then alter the trend line downwards as the years go by.

Sea_Shell · 18 May 2019 at 7:39AM

We're working on the principal (rightly or wrongly) that we need to achieve 3% from our starting baseline pot. This will meet our usual spending needs without reducing capital. (this excludes SP when they kick in....eventually!!)

At present our pot stands at £24,000 above our baseline, due to recent fluctuations, so we have some "flexibility" built in already.

Obviously if we increased our spending a bit, or made any large purchases, it all has to come out of the pot, so we'd review as we go, in that respect. The same with inflation, if it started to get out of control, relative to our remaining pot at any given time, we'd reassess our plan.

IMO I think flexibility is the key. Being able to (or wanting to) adjust your lifestyle depending on current market conditions (within reason), so making hay whilst the sun shines, but being prepared to reign it in if the wheels look like they're falling off!!! - But that's just us!!!

saver_ali · 18 May 2019 at 8:41AM

I'm currently reading a book that was recommended on an earlier thread, called "Beyond the 4% rule" by Abraham Okusanya, which claims to discuss "the science of retirement portfolios that last a lifetime". It's good so far, but I'm only a third of the way through it!

Thrugelmir · 18 May 2019 at 9:05AM

michaels wrote: »

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.

Are you referring to the market indices?

You make no reference to a fixed interest portfolio either. A 100% equity exposure could swing wildly depending on the markets that you invest in. Markets in themselves being a very broad term.

Linton · 18 May 2019 at 9:42AM

michaels wrote: »

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

This seems wrong for two reasons, one simple and the other rather deeper.....

A) A trend line is simply a rationalisation of the past. It gives you no information as to the future. The danger is that it could easily lead you to taking too much money too early on.

In my experience the model you use for planning retirement does not and should not be used for what you actually drawdown during retirement. Its sole purpose is to give you the confidence to stop working and to start living off your savings/investments. Within a very few years you are likely to find that some of the assumptions you made in your planning no longer apply. At that point the logical response is to make a new long term plan, not to carry on blindly with the old one.

AnotherJoe · 18 May 2019 at 10:03AM

Without seeing any numbers £24k seems very close to the bone to me..but 3% is also a lowball number so that compensates somewhat. As, frankly is not allowing the pot to decrease when you've also got (presumably) 2x SP coming on stream soonish which will mean you can decrease the 3% take

Sea_Shell · 18 May 2019 at 10:08AM

AnotherJoe wrote: »

Without seeing any numbers £24k seems very close to the bone to me..but 3% is also a lowball number so that compensates somewhat. As, frankly is not allowing the pot to decrease when you've also got (presumably) 2x SP coming on stream soonish which will mean you can decrease the 3% take

Sorry, were you referring to my £24k?? I didn't post my actual pot numbers, just that we're that much over our benchmark at present, so therefore a drop of £24k would not affect our plan. IYSWIM.

jamesd · 18 May 2019 at 10:45AM

AnotherJoe wrote: »

Without seeing any numbers £24k seems very close to the bone to me..but 3% is also a lowball number so that compensates somewhat. As, frankly is not allowing the pot to decrease when you've also got (presumably) 2x SP coming on stream soonish which will mean you can decrease the 3% take

This would normally substantially increase the initial take to cover for the missing state pensions. Then fall back based on the resulting lower pot. Or as Guyton does in his practice, a split:

1. bridging pot to cover the missing pensions
2. lifetime safe withdrawal rate income from the rest, or combination of some lifetime and some discretionary.

SWR start point and market value on retirement

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