Another take on SWR
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  1. #1
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    Another take on SWR

    i have only skimmed this and thought it interesting enough to pass along.

    http://portfoliocharts.com/2015/09/0...robably-wrong/


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    Somehow we all got bitten by the SWR bug? I've been reading material for the last few days. Here's one view:
    http://financialmentor.com/retiremen...wal-rate/13192

    The first point that has me really thinking is that the oft-cited work is based on US markets during the years of incredible US expansion. The analysis has also been attempted on international markets:

    Using 109 years of data for each of 17 different developed countries, Pfau determined that a 4% withdrawal rate with a fixed 50/50 asset allocation would have failed in all 17 countries. Yes, a 100% failure rate.
    That's obviously a very important result. How come I don't hear this mentioned more often? The US market is unique in the world, as the US has expanded to become a global empire. But here are all of us, basing all of our stock market expectations on the US's history of stellar performance.

    To me, it seems unlikely to be repeated. I'm getting the impression that SWR models (and stock market projections in general) are wildly optimistic, going forward.

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    Building more on the international theme, which is relevant both to us as Canadians but also for everyone (since the unique US expansion cannot repeat), see this other article
    http://www.mcleanam.com/probability-...retire-safely/

    This mentions that for the UK, the SWR was 3.43%. Then with more global diversification, he found SWR was 3.26%

    I recently exchanged emails with my friend who is an algorithm developer at a major Bay Street investment bank. I described to him my reasoning for why an expected SWR in our situation is 3.3% to 3.5% and he agreed with that range. I actually made that estimate before I saw the above article about the UK & global results, so now my analysis has confirmation from both my investment banker friend, and the international study.

    Therefore I am recommending that my parents plan for SWR of 3.3% to 3.5%

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    Yes James, 3% SWR is the new 4%. This is not a big revelation. It's been the consensus in the retirement planning community for a few years now. Future investment returns are very likely to be lower than the past returns.

    Note that academic SWR strategy is very rigid. You withdraw a certain percentage of your portfolio in the first year of retirement. From there on, you index your withdrawal amount to inflation, without paying any attention to investment performance of your portfolio. This model may be correct from the academic point of view, but it looks rather silly in real life. Most of us have the flexibility to withdraw more or less depending on the investment performance. Consume more in the bull markets. Consume less in the bear markets. Staying flexible reduces the risk of grinding your portfolio to zero.

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    Variable Percentage Withdrawal

    Has anyone investigated Variable Percentage Withdrawal (VPW) strategies?
    http://www.financialwisdomforum.org/...?f=30&t=117200
    http://www.bogleheads.org/wiki/Varia...age_withdrawal

    It adjusts withdrawal amounts annually based on portfolio value, and puts a rigorous method on the "Consume more in the bull markets. Consume less in the bear markets." approach mentioned by GoldStone. It really lessens the probability of running out of money in retirement. Also fixed percentage withdrawal (like the 4% rule) tends to leave behind a large estate if the retiree experiences a long period of normal or high investment returns.

    Using such a method requires that you have the ability to cut back spending when returns are low, which is fine if you have low non-discretionary spending with areas of discretionary spending like travel or hobbies. It would not work well for LBYM people whose non-discretionary spending is high relative to total spending.

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    Quote Originally Posted by GreatLaker View Post
    Has anyone investigated Variable Percentage Withdrawal (VPW) strategies?
    http://www.financialwisdomforum.org/...?f=30&t=117200
    http://www.bogleheads.org/wiki/Varia...age_withdrawal
    No, but it's totally on my radar. I plan to investigate it in depth when I retire.

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    In addition to being able to vary spending from your portfolio annually, other decumulation methods will affect a portfolio SWR calculation. For example:
    i) Building up a cash wedge to fund your first 5 years or so.
    ii) Buying an annuity so that it plus cpp/pension income are enough to cover your basic living costs. Annuities are better bought around age 70. Then withdrawls from your portfolio need only cover your additional discretionary costs.

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    Quote Originally Posted by GoldStone View Post
    Yes James, 3% SWR is the new 4%. This is not a big revelation. It's been the consensus in the retirement planning community for a few years now. Future investment returns are very likely to be lower than the past returns.

    Note that academic SWR strategy is very rigid. You withdraw a certain percentage of your portfolio in the first year of retirement. From there on, you index your withdrawal amount to inflation, without paying any attention to investment performance of your portfolio. This model may be correct from the academic point of view, but it looks rather silly in real life. Most of us have the flexibility to withdraw more or less depending on the investment performance. Consume more in the bull markets. Consume less in the bear markets. Staying flexible reduces the risk of grinding your portfolio to zero.
    Smart response.

    There is certainly what the academics tout and then there is living in the real world.
    Hidden Content - Working on a $1 million portfolio and $30k per year from it.

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    Good posts GreatLaker and Goldstone.

    I don't like a SWR strategy for the reasons you mentioned. It's too rigid and not really "safe".

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    This page is part of a larger article where it compares international markets and their ability to successfully sustain a 4% SWR: http://www.fa-mag.com/news/why-4--co...tion=47&page=2

    I've also seen mentioned a few times that as a corollary to sequence of returns risk, one is more likely to be successful if one retires when the markets are in correction mode rather than at all time peaks.


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