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How to choose an SWR for your ISA and your pension to hit Financial Independence fast

How to choose an SWR for your ISA and your pension to hit Financial Independence fast post image

This is part four of a series on how to maximise your ISAs and SIPPs to achieve Financial Independence (FI).


Previously, on How To Split Your Pot Between ISAs and Your Pension For Fun and Profit:

  • Part one set out the FI problem of retiring early using UK tax shelters.
  • Part two explained why the tax advantages of personal pensions make them superior to ISAs later in life.
  • Part three laid down a basic plan for judging how much you need in ISAs compared to SIPPs.



Customising the plan to your own situation relies on knowing what sustainable withdrawal rate (SWR) to use.

Before we get into that, I’ll recap the plan so far:

  • We’ll live on our personal pensions from our minimum pension age onwards.1
  • Our ISAs and General Investment Accounts (GIAs) bridge the gap between giving up work and popping the corks on our pensions.
  • We won’t bank on our ISAs and GIAs lasting longer than those gap years. That enables us to balance the need to grow our wealth as tax efficiently as possible against retiring early without taking unnecessary risks.
  • We’re not rich enough to ignore the risk of low growth or an unfortunate sequence of returns, so we’ll need a strong dose of risky assets (hello equities!) to reach our goal2 plus a buffer zone of lower risk assets (we meet again, bonds and cash).

To ensure our FI plan is based on something other than gut instinct, bum-clenching, and the sweet smile of Lady Fortuna, we’ll base our calculations on the best research we can.

As well as having a (very) rough idea of how much annual income we’ll need and how long it should last, we need to know how much wealth we must build before we can celebrate our independence day.

Cue letting off firecrackers in the office, stripping to the waist to the sound of Ride Of The Valkyries, and telling the boss we love the smell of resignation in the morning!

But I digress…

We need a credible sustainable withdrawal rate

SWRs are designed to guard against the disaster of drawing too much, too fast, too soon from our investments, and so running out of money like a gaggle of teenagers running out of gas near an axe-murderers’ convention in a spooky wood.

  • Your SWR number is a guide to how much annual income you can sustainably draw from your portfolio given certain sassy parameters (see below).

Knowing your desired income and SWR enables you to calculate how much wealth you must first build to later sustain that annual cashflow at that rate of withdrawal.

See the bonus appendix at the bottom of this post for the maths.

A credible SWR is a good planning tool because…

  • …it deals with the fact that we’ll be living off a volatile portfolio of assets that can fork out an unpredictable range of outcomes: good, bad, and indifferent. This is the root of sequence of returns risk – the danger that a bad run of market returns exhausts a deaccumulation portfolio in short order.
  • …excellent SWR research is publicly available and relevant to DIY investors relying on their own resources to plan their future.
  • …SWR strategies can cope with historically bad investment returns, but aren’t so cautious that we must postpone our financial independence for years trying to guarantee safety.
  • …SWR strategies enable you to withdraw a consistent, inflation-adjusted income for the duration of your retirement (subject to all-important caveats that you need to understand).

I understand that some readers prefer an even more cautious approach, or have already accumulated sufficient assets or income streams not to need to worry about SWRs.

That’s all well and good. But not everybody – including me – has that luxury. Safety costs money.

I’ll give you the information you need to use SWRs appropriately while understanding the limitations of the strategy.

From that vantage point, you can then decide if an SWR strategy makes sense to you. Just rest assured I’m not a 4%-rule groupie, or a lifestyle blogger with a course to sell.

For SWR parameters, caveats, terms and conditions, please read:

Choosing your SWR

I’ll base our SWR numbers on the research of Professor Wade Pfau.

Pfau is widely respected in the field of retirement research. He’s attacked the withdrawal rate conundrum from multiple angles. Also, he has researched SWR rates for time periods lasting from ten to 40 years.

That’s important because many of us will need two SWR numbers:

  • The rate at which we can withdraw from our ISA, so that we don’t run out of money before we can access our personal pension.
  • The rate at which can we withdraw from our portfolio – combined across all accounts – so we don’t run out of money for the rest of our lives.

Pfau uses historic market returns and Monte Carlo sims to scope the variety of market conditions we may face in the future.

Monte Carlo sims reshuffle returns data to generate many more scenarios than are available from the historic record. They’re alternative history generators, enabling us to stress test our plans against extreme circumstances that didn’t occur. Think Great Depression followed by Great Recession.

Pfau has also produced SWRs curtailed by the high valuation, low interest rate world we face right now.

The weakness of Pfau’s research is that it uses US historic returns that have been relatively benign in comparison to the global investment experience.

Because Monevator readers are mostly non-US investors with globally diversified portfolios, we need to cross-check US research against accessible global data to make sure we’re not unwittingly adopting an SWR that’s too sunny for grey old Blighty.

That’s where Timeline comes in.

Timeline is withdrawal rate strategy software designed for financial planners. It’s excellent, and thanks to its free trial, we can dial up global market returns data in both historic and Monte Carlo flavours. I strongly recommend you try the free Timeline trial and use it to stress test your own plan.

SWRs for ten to 50-year periods

Okay, that’s a lot of preamble to get to the money shot but here it is. Below you’ll find the SWR numbers I’m using to model our ISA / SIPP FI plan.

Because there isn’t one SWR to rule them all – and because we’re trying to get a grip on an uncertain future – I’m going to show you a range of SWRs for each time period. You can then make an informed decision about how conservative you want to be.

There’s a full explanation below of the terms used in the table.

This table could do with some explaining:

TimespanThe maximum period in years that you need your investments to last. For example you need your ISA to bridge a 15-year gap until your minimum pension age, you could choose a 5% SWR by the light of the Low Interest SWR column. If that ISA must last 20 years then choose a 4% SWR from the Low Interest SWR column.

What if you’re an in-betweeny? What if you have a 17 year gap to plug? If you’re an optimist then you’ll round 17 years down to 15 and choose a 5% SWR. If you’re cautious, then round your time horizon up, and choose the 20-year 4% SWR.

Or you could compromise with a 4.5% SWR, knowing that SWR rates are a curve and that a 4.5% SWR is supported by the historical and Monte Carlo results for the 20-year period.

For lifetime spending, most of us are best off choosing a 40-year plus timespan

For eight-year periods or less: save enough in cash to cover your spending needs plus an inflation top-up.3 The potential upside of equities isn’t worth the risk of grievous loss with so little time to bounce back.

Historic SWR – Pfau’s research for 15- to 40-year timespans using US historic asset returns (1926-2014). (See table 1 in his research paper).

Pfau provides SWRs for different asset allocations (0% – 100% US equities versus 100% – 0% US government bonds) plus success rates. Our table shows the best SWR for a particular time period and success rate. Click the table 1 link above to see Pfau’s asset allocation findings, and please also refer to our asset allocation section below. Pfau published an updated version of this research in his book How Much Can I Spend In Retirement?4

Monte Carlo SWR – Pfau’s Monte Carlo simulation of ten to 40-year timespans using US asset returns data. See table 3. Success rates are converted into failure rates in that linked research paper. Again, click the table 3 link for asset allocation info and see below. An updated version of this research is also available in Pfau’s book How Much Can I Spend In Retirement?5

Low Interest SWR – Pfau’s Monte Carlo simulation of 15 to 40-year timespans using US asset returns data anchored to low interest rates. See table 2.

Pfau’s sim is designed to reflect the low interest rate conditions that have hung over the world since the Great Recession. He allows assets to slowly rebound to their historic average returns over time.

Low interest rates reduce the expected returns of equities and bonds, and so this column is especially relevant for anyone retiring in the next ten to 15 years. You can see that the Low Interest SWRs clock in around 1% lower than the historic and Monte Carlo norms.

Global Portfolio SWR Timeline uses global asset returns data that isn’t publicly available to produce withdrawal rate strategies suitable for UK investors.

I can’t just publish their data, but I’ve used their superb app to sense check Pfau’s work. The Global Portfolio SWR shown in the table is a downbeat take on Timeline results, using both historic and Monte Carlo scenarios.

The Global Portfolio SWR generally lags the US historic and Monte Carlo SWRs but it’s a sight better than the Low Interest SWR. Unfortunately, the Low Interest SWR is only based on US asset returns, albeit crocked by low interest rates, so a Global SWR equivalent could be worse still.

My Timeline results didn’t take into account current market valuations, although it looks like their Monte Carlo sim is flexible enough to do so.

Take heart though – the Global Portfolio SWR does incorporate the drag of 0.5% investment fees6 while Pfau’s work skips that problem.

Success rate – This is the percentage of scenarios where the simulated portfolio didn’t run out of money before the end of the timespan. For example, a 6% Historic SWR left you with money in the bank in 99% of scenarios simulating a 15-year retirement. Note, the success rate may actually be 100% but I’ve adopted the Timeline convention of capping out at 99% because failure is always possible.

Any scenario that ends its run with so much as £1 left counts as a success. In reality, a retiree would almost certainly notice their balance plummeting long before and cut back on spending to prevent their portfolio going to zero.

Success rates for the Low Interest SWRs are much worse as you can see in the Success Rate Low Interest column.

Some research deals in failure rates, which are success rates for pessimists. A 95% success rate equals a 5% failure rate.

SWR patterns

The higher your SWR, the less wealth you need to have saved to deliver your desired income.

  • SWRs are generally higher for shorter timespans.
  • SWRs are lowered by higher success rates.
  • Higher equity allocations are generally needed to maintain feasible SWRs over long timespans.

You can offset the negative effect of longer timespans by lowering your success rate and upping your equity allocation to some degree.

I’ve generally erred on the side of 99% success rates for ten to 25-year periods that I think of as the ISA years. You could lower the success rate if you don’t mind going back to work if you cop a nightmare scenario. You can also trim your success rate if you’re prepared to cut your spending by 10% to 20%.

The 30-year plus periods are personal pension territory and so I’ve reduced the success rates to 95% or 90% because you’ll likely have plenty of back-up options. These could include still having money left in your ISA, cutting spending if needed, equity release, using annuities, eventually drawing a State Pension, and/or failing to set a Guinness World Record for life expectancy.

I personally think success rates below 90% are unacceptable. There’s no getting around it in the Success Rate Low Interest column though – Pfau didn’t calculate the success rate for SWRs lower than 3%. You could cut your SWR to 2.5% or even 2%, or rely on the back-up options mentioned above should the worst case materialise in your lifetime.

If your retirement is many decades away then you can console yourself with the thought that historical norms may have reestablished themselves by the time you’re ready to use your SWR for real. I suspect many of us think a ‘new normal’ has descended upon the world, though.

It’s worth dwelling on Pfau’s cautionary note:

Historical withdrawal rates are not random; they tend to be lower when stock market valuations are high and when interest rates are low.

Both of these factors are at work today in a way that has been rarely experienced in the historical record.

If you’d like to know more about how SWRs are constructed and how sensitive they are to variations in volatility, inflation, asset returns, success rates, and the sequence of returns then check out Pfau’s deep dive into the topic.

Meanwhile Timeline enables you to play with the parameters as if you’re sitting at your own financial mixing desk.

The upshot is there’s no point ceaselessly searching for the optimal SWR. It doesn’t exist. I’ve rounded the SWRs in the table to the nearest half point because precision creates a false impression of control.

Similarly there’s no point ceaselessly searching for cast-iron safety. It doesn’t exist. The point of this exercise is to provide a practical platform for planning.

Remember you also need to adjust your SWR to account for the cost of investing. We suggest you deduct 50% of your total expected annual fees from your SWR. (We only deduct half because of the mathematics of a real-world portfolio drawdown).

I’ve assumed total fees of 0.5% (0.25% platform fees and 0.25% average portfolio OCF), so I’d need to chip 0.25% off the SWRs from the table above (except the Global Portfolio SWRs which already include 0.5% in fees). For example, if I choose a Low Interest SWR of 5% then I need to pare it back to 4.75% to account for the impact of fees.

Make sure your retirement income is calculated gross of taxes and you’ll need to reduce your SWR again if you want to leave a legacy. SWRs assume you can use up all your capital in the worst case scenarios.

SWR asset allocations for FI

Hunting for the optimal asset allocation to support your SWR is another fool’s errand. Table 3 in Pfau’s research shows just how much asset allocations can vary and still come within a whisker of the same SWR result.

For example, an equity allocation of anywhere between 33% and 72% lies within 0.1% of the best SWR for a 40-year period with a 90% success rate. That’s good news if you don’t have a sky high risk tolerance.

Still, it’s worth understanding the ballpark asset allocations that supported the Global Portfolio SWRs for each timespan and success rate in our table above:

Timespan (Years) Global Portfolio SWR (%) Global Equity/UK bonds/Cash
asset allocation (%)
10 8 30/30/40
15 5.5 30/30/40
20 4.5 30/30/40
25 3.5 60/40/0
30 3.5 70/30/0
40 3 70/30/0
45 3 70/30/0
50 3 70/30/0

Surprisingly few equities are required over periods of ten to 20 years to achieve a high success rate. That’s because the volatility of risky equities needs to be balanced by low risk assets over such a short time.

Pfau’s work with US returns shows much the same thing. Equities hover around 20% for portfolios that must survive ten to 20 years with a success rate of 99%.

Cash figures heavily because historical UK government bond returns are generally long bonds that got smashed during high inflation episodes, especially from 1947 to 1974. Pfau uncovers the same pattern in the US; allocations of around 40% cash (or bills) deliver success rates of 99% for ten to 20-year timespans. Cash is an underrated asset that dampens volatility and it does better against unexpected inflation than is commonly assumed.

I found the 70:30 portfolio results could all be improved upon in Timeline by going to an 80:20 equity:bond allocation. Yet beware of torturing the data and ending up with a concentrated portfolio that’s optimised for the past. History rhymes but it doesn’t repeat. Past results can impart useful guiding principles, but shouldn’t lead us to fight the last war by banking everything on a Maginot Line of, say, 100% small cap equities.

Pfau also says that historical data is biased against bonds because the overlapping retirement periods examined by historical sims overweight the middle part of the track record. That period coincides with a savage bear market for bonds.

Monte Carlo sims don’t suffer this problem and tend to show that higher bond allocations can support higher SWRs than assumed by historic data research. Again, see Pfau’s table 3.

I wouldn’t blame anyone for cutting back their bond allocation given the current outlook but you should still hold a substantial slug because diversification is your best defence against an uncertain future.

Caution ahead

The green numbers in my table above are the SWRs I’ll employ in the upcoming and earth-shattering case studies later in the series.

I’ve picked the most conservative SWRs available from the range because they’re likely to protect us from bad outcomes – short of The Four Horsemen defecating on humanity’s doorstep.

Indeed one of the problems with SWRs is that they often leave too much money on the table if you don’t suffer a terrible sequence of returns. Don’t feel pressured to heavily discount the green SWRs in the table if it means you must spend so long building a bomb-proof level of wealth that you will never get to enjoy it.

Ultimately an SWR is our placeholder for an unknown future, and we could debate it until the future arrives.

Nobody should delude themselves that any system can bestow safety or a perfect outcome. Choose your trade-offs, understand your risks, enjoy your independence, adapt as you go. That is what this series is about. 

The plan we’re sketching is not a forecast. It’s just enough to get us off on the right foot. Prepare to take further steps along the way.

Next episode: You’ve probably noticed that choosing a suitable pre-pension SWR relies on knowing how long your ISA / GIA should last. We walk through the full financial independence calculation that enables you to work that out and finally get your ISA and pension working in tandem to achieve FI.

Take it steady,

The Accumulator

Bonus appendix: SWR maths is fun!

How much wealth do you need to sustain an inflation-adjusted income?

It works like this:

Divide your required FI income by your SWR.

For example:

£25,000 / 0.05 (5% SWR) = £500,000 stash required to sustain an inflation-adjusted £25,000 for 15 years – according to the Low Interest SWR column of our table above.

How much more would you have to save to increase your income by £1,000?

£1,000 / 0.05 = £20,000

£520,000 is therefore needed to support an inflation-adjusted income of £26,000 for 15 years with a 5% SWR.

How much less could you save if you earned £5,000 part-time a year for those 15 years?

£5,000 / 0.05 = £100,000 less required in stash.

Or, £20,000 / 0.05 = £400,000 stash.

How SWR withdrawals work

Year 1 income:

Multiply your portfolio’s value by your SWR

For example, if your SWR is 5% and your portfolio is worth £500,000:

£500,000 x 0.05 = £25,000 annual income

Year 2 income:

Adjust last year’s income by year 1’s inflation rate (e.g. 3%):

£25,000 x 1.03 = £25,750

The SWR percentage only applies to your first withdrawal. Every year after, you withdraw the same income as year one, adjusted for inflation, regardless of the percentage that this removes from your portfolio.

Year 3 income:

Adjust last year’s income by year two’s inflation rate (e.g. 2%):

£25,750 x 1.02 = £26,265

And so on. Every year ye shall live, or have money left.

Like this? Enjoy more maths-for-investors fun with Monevator.

  1. The minimum pension age lies between 55 and 60, depending on when you’re born. []
  2. The exception is bridging an eight-year or smaller time gap until accessing your personal pensions. It makes sense to rely on cash for periods as short as this. []
  3. Or build an index-linked UK government bond ladder. []
  4. Exhibit 4.5 page 87. []
  5. Exhibit 4.8 page 94. []
  6. And 0.5% should easily be enough to cover platform costs and a portfolio of keenly priced index trackers. []
{ 97 comments… add one }
  • 1 Mathmo February 4, 2020, 2:55 pm

    Nice article – so much discussion on swr disappears up its own asset allocation because people have philosophical problems with the prescription of an inflation linked constant withdrawal. While we can’t know how much is enough – having a rough rule of thumb is an essential first step!

    Nicely balanced and enjoyed your point about not letting swr drive asset allocation – so tempting to look at what you need to draw and therefore what your allocation and risk tolerance should be. Does needing the cash make you braver?!

  • 2 Matthew February 4, 2020, 2:56 pm

    You can shift market risk from the drawdown into accumulation, and probably have an earlier retirement, by being flexible about when you retire, thus being high in equities accumulating and then buy an annuity with the extra growth – More safety when accumulating probably means less growth/ safety when drawing

    It’d seem sensible because market risk isnt so intolerable when working. For drawdown we have to seperate what part of a pension is primarily an inheritance vehicle or for retirement.

  • 3 Neverland February 4, 2020, 3:23 pm

    You have to see the funny side:

    – post about brexit, 150+ comments
    – post about expense and share price tracking excel macros, 50+ comments
    – post about safe withdrawal rate; 3 comments

    I kinda had plans for an SWR (ex-fees) of 2.5% myself so I can’t argue with your maths although I got there differently

    Even at that SWR we will still have back-ups from a home that can be equity released and state pensions

  • 4 Brady February 4, 2020, 3:47 pm

    Great post, thanks.

    1) I have a slight headache now.
    2) if 3% SWR is the right number, it means I don’t have to worry about ISA savings as I’ll need to work through to age 57 to pay in enough into pension!

  • 5 Sharkey February 4, 2020, 4:03 pm

    I’d be interested in peoples thoughts on a Cash/Cash equivalent investment for that 8 year ISA period that is likely to give some inflation protection. Is the best we can do (far any decent sized investment) choose the current best buy savings/cash isa account (about 1.5% currently) and hope that interest rates will rise if inflation starts to go gang busters?

  • 6 Dawn February 4, 2020, 4:12 pm

    This is great, thanks for putting all this together, its so helpful.
    Ill be re reading it again. Ill do timeline to.
    The bridging SWR doe’snt apply to me as im 55yr this year so can access my pp.
    Still working part time and loving it.
    leaving portfolio to grow , done that many stress tests ,I got to 3.4% swr
    IF state pension was 100% guaranteed at 67yrs I could happily have higher swr.

  • 7 Jonathan February 4, 2020, 5:25 pm

    It always surprises me how pessimistic SWR calculations are. For example, taking your favoured (green) values, for the first 30 years your SWR assumes the investment doesn’t keep pace with inflation. (If it did that and no more, you could draw 3.3% a year).

    Now I appreciate anyone planning capital withdrawal as their sole support for the rest of their life (no State Pension) is not going to make unduly optimistic assumptions. And if present time building society rates were taken as the benchmark for low interest investments then real values would indeed fall, though that would be an extraordinary approach to an entire pension fund. But I wonder if the modellers have really come up with a scenario with even 1% probability where a realistic cautious portfolio fails to cover inflation for 30 years.

    It is possible it is an inevitable problem with trying to model an unknown future with a single number. As you point out, in reality anyone seeing their assets dropping would mitigate the situation by (for example) adjusting spending. Could modelling a combination of withdrawal rate and predetermined mitigation strategy produce a tighter spread of outcomes, representing a lower failure rate?

  • 8 Adam February 4, 2020, 5:26 pm

    Love the humour at the start of the article – funny & great intro!

    Thanks for saying there is a risk of too much money on the table. I think the 2-3% crowd are at risk of unnecessarily delaying retirement and giving their estate beneficiaries inheritance tax problems. If they are happy to work all the hours so their estate above the NRB pays 40% tax. However I plan to risk it with 4-5% (+part time work).

  • 9 Seeking Fire February 4, 2020, 5:29 pm

    This is extremely good. Thank you for all your hard work. If you make anything from any referral links then it is very well deserved. It is also so much more thoughtful than bloggers who say 25x and you are done for ever.

    My gut is telling me a 50 year withdrawal period (max), which is what I am looking is significantly <3% including fees based on the research out there – including your comments. 50 years can just roll off the tongue. But then look back 50 years – 1970's – world totally different to how it is now. What will it be in 50 years time – totally different to how it is now. Real leap of faith.

    As a result my plan is just to try (if possible) to slowly taper down the work over the next ten years. Massively reduces the SWR risk / psychologically feels better

  • 10 weenie February 4, 2020, 5:55 pm


    “Is the best we can do (far any decent sized investment) choose the current best buy savings/cash isa account (about 1.5% currently)”

    Park some of it in Premium Bonds? Rate of return is considered to be 1.4%.

  • 11 AVB February 4, 2020, 6:02 pm

    “Think Great Depression followed by Great Recession.”

    Some have argued a problem with Monte-Carlo simulation is that they don’t exhibit mean reversion.

  • 12 Al Cam February 4, 2020, 6:19 pm

    You have struck a nice balance in this article between safety-first conservatives (small c only!) and the SWR disciples; so, very well done.

    One small and rather pernickety comment if I may.

    I am familiar with Pfau’s work and unless I am mistaken he does not use bootstrapping in his MC simulations but rather a normal or log normal distribution. Thus, it is probably not strictly correct to say that “Monte Carlo sims reshuffle returns data” but rather that Monte Carlo simulations provide returns data that fluctuates around the specified averages, or something similar.

    Keep up the good work and I too await your 8 year discussion with interest.

  • 13 Cigano February 4, 2020, 6:23 pm

    Great series of articles so far.

    I can see the argument for planning and therefore investing as if post FI there are 2 distinct phases that we need take income from different wrappers and have different durations. Pre SIPP eligibility (p1) followed once your SIPP is available to draw from (p2) It also makes sense that given the different durations each phase might reasonably have its own SWR sustaining an inflation adjusted income.

    I hope somewhere in a future article you will consider what impact the State Pension will make on income needs, and therefore whether we in fact need a third phase with its own duration and SWR. That phase (p3) running from when SP kicks in, and potentially for those lucky enough to have work related pensions.

    In own case I’m pretty much pulling the trigger in (p2) with a third of the portfolio in ISAs and the other two thirds in SIPPs, and need to “bridge” income (withdrawals) at a certain level until SP comes along and gives me 25% of my income needs for the rest of my days. Potentially I need a higher SWR but only for the bridging years, then a lower SWR after SP kicks in.

    Anyone in a similar position or with thoughts to share on how to bridge income in phase 3 and how to model with SWR

  • 14 Gentlemans Family Finances February 4, 2020, 6:36 pm

    Great post and worth a second reading.

    Maybe I am not reading this correctly but the maths and application to combine a swr for pre pension funds and future swr for pension funds is more complex than is presented here. Asset allocation is mentioned but not in this context.
    Working out a swr for less than 30 years is fine and simple but pension age (20 years away for me on early access at 58) makes me think my pension is overstuffed and my Early Retirement will be lean!
    And to make it even worse you only find out too late that you did your sums wrong.

    Fyi: age 38 and thinking a swr of 5% to 58/60 and 5% thereafter.
    Property ownership, state pension, kids and inheritances cloud things

  • 15 Dan H February 4, 2020, 9:27 pm

    Great post. One to bookmark :).

    I’ll be early 40s when I FIRE. I generally think of my SWR in context of my overall portfolio (pension and ISA). I balance pension/ISA contributions based on simulated runs of expected ISA holdings on my retirement date. My ISA SWR based on these forecasts is between 4.8% – 5.3%. Reassuring to see this looks in the right ballpark for a 16/17 year gap to private pension.

    Looking forward to the case studies.

  • 16 Faustus February 4, 2020, 10:05 pm

    Very useful discussion and plenty of food for thought.

    I do feel some sympathy with @Jonathan about the pessimism built into these low withdrawal rates. A key issue in working out a sensible SWR is how flexible one can be with drawdown (e.g. is there some scope to reduce expenditure when the market is tanking, thereby helping to preserve capital, which can then be reversed when the markets are booming?). That won’t of course be possible for those on very lean FIRE programmes, where almost all expenditure is on the essentials, but for many preparing to live off a more generous retirement income this should be perfectly feasible.

    Some very intriguing research has been undertaken by Guyton and Klinger (2006) which indicated that by using a few simple rules and being flexible with drawdown, it is possible to sustain a SWR of 5-6% for 40 years, maintaining purchasing power, with success rates of over 98%. And apparently the use of global equities in the portfolio (rather than just the S&P 500) increased the success rate. Would be interested to know what others have made of their findings.

  • 17 W February 4, 2020, 11:14 pm

    If the biggest risk is poor returns in the early years, one strategy to reduce the risk is a rising equity glide path. You start drawdown with a lower equity allocation, say 60%, and 40% bonds, and for the first decade rebalance annually increasing your equity proportion until you arrive at your final target allocation, which should probably be at least 75-80% equities. This reduces equity exposure during the initial years when poor equity returns would be critical, and allows for bonds to be sold in preference to equities if equities tank. The gradual rebalancing into equities recognises the fact that for a long retirement a high allocation is required to generate sustainable returns. This approach gives up some upside in the early years in order to alleviate some of the potential downside when the impact would be most devastating.

    Because portfolio survival is achieved by good returns buffering periods of poor returns, in the vast majority of cases with a conservative SWR a large surplus accrues. If there is no desire to accumulate a legacy then if early returns are good, instead of adjusting by inflation, the same cautious withdrawal rate could be calculated again off the current portfolio value as if starting from year one again. As the most conservative SWRs have been stress tested to survive poor early returns, then in theory if returns are good it should be possible to reset the same SWR to the larger portfolio value annually for as long as the portfolio is growing, and only revert to inflation only adjustments when the first year of negative returns occurs. This approach would be taking the theory to its limit, but if the SWR selected is predicated on surviving the worst of historical return sequences, then the portfolio should survive. However, past results may mean nothing in future, so this is not to say this is the way to go. But the underlying point is that if the portfolio grows – in inflation adjusted terms – then there should be scope for occasional uprating of income to reflect the portfolios new value, while still maintaining the same SWR.

  • 18 Mezzanine February 4, 2020, 11:58 pm

    If, say £20k is needed for the first 15yrs followed by £10k for a further 15yrs+ from the same pot, can an asset allocation and SWR taking account of the combined-timescale be used to calculate the capital needed for the average annual drawdown?

    i.e. £15k for 30yrs @ 3.5% = £429k pot?

    I’m guessing it’s not that simple and I’ll have to wait for a later episode… 😉

  • 19 John B February 5, 2020, 12:36 am

    Surely that’s equivalent to 2 pots, one providing £10k for 25 years, and another providing £10k for 15.

  • 20 britinkiwi February 5, 2020, 1:05 am

    Thanks for this complex but enlightening post! Lots to investigate.

    As I’m this close to loving that smell in the morning this may (or may not) lead me to reconsider once I’ve worked through all the links, being over 55 (59) with a reasonable 60/40 pot available for use and no real desire to leave lots for posterity.

    Simplified by not having an ISA anymore, of course.

    @W – that’s a valid point which I’m going to have to think about in due course and one I’ve come across before – and with state pensions (at age 65) taking the place of bonds as a concept?

    Good job there’s a stat (bank holiday) – Waitangi Day – tomorrow!

  • 21 Naeclue February 5, 2020, 1:43 am

    @Jonathan and @Faustus, the thing about using SWRs is that it is all about minimising worst case outcomes rather than considering expected outcomes (average outcomes). For example, the 4o year drawdown rate of 3% has a 95% success rate for the Global Portfolio. That means there is a 5% failure rate. However, the expected or average outcome would be a substantial legacy if you drawdown at 3%. So when you are actually drawing down, it is far more likely that you will be able to spend more than 3% than you would run out of money. So looking on the brightside, the odds are that you would be able to spend more than 3%!

    Here is a conundrum that others might like to think about, which I mentioned in a comment on a previous article. Angus has £1m, chucks in work, drawing £30k a year as he is targeting a 40y drawdown. He has a friend Billy, who also has £1m, but Billy decides to wait another year before retiring. Billy does not save any more, but finds that his retirement pot is only worth £900k when he chooses to retire. Targetting a 39y drawdown period, Billy uses 3% SWR, resulting in an income of £27k. Angus is now drawing £30.6k as he has raised the drawdown in line with inflation, but now only has a pot of £870k. In other words Angus is now drawing down at 3.5%. Angus says this is fine as he started drawing down at 3% so it will all work out and tells Billy he should be safe drawing down at 3.5% as well, despite @TA, pfau, etc. saying 3% is the good prudent SWR. Is Angus right? Should we look back a year or two before choosing our SWR?

  • 22 JimJim February 5, 2020, 6:40 am

    @ Naeclue, Re Angus and Billy
    We get into the realms of predicting markets short term if we look too hard at the last year or so. (I bet against U.S stocks by not investing and moving things to other parts of the world believing that mean reversion to CAPE should happen over the pond two years ago, that didn’t work well for me) Monte Carlo may not be a perfect tool but it looks at enough outcomes to be the best thing we have at the moment. Knowledge of where we are at any point in draw-down and the ability to build in flexibility to our plan should protect us from some of the vagaries of the small percentages of failure in Monte Carlo.
    Billie and Angus *probably* will conform to Monte Carlo, that’s the point, even if they have no flexibility in the plan.

  • 23 John B February 5, 2020, 8:10 am

    The success rate for a SWR is a function of where you are in the market cycle. The 5% failure rate is when you are at a peak before a trough like Angus. Billy can be more confident he is in the 95% success because he is in a trough. So you could look at a rolling window, 5 years before, 45 years after to tweak your SWR.

    Its also misleading to consider the SWR as a fixed %age each year. Its best to treat inflation as 0 (and reduce portfolio capital gains accordingly) and be aware that the SWR will ramp as the timescale diminishes.

    Slavish following SWR rules could mean you working One More Year, saving hard, only to find you were further from retirement than before, because of a market crash. So, OMY as the recession continues, then finally the market recovers, you retire, and you are swimming in cash when you die.

  • 24 Neverland February 5, 2020, 8:50 am

    @Jonathan @Faustus

    Whether you run out of money or not depends largely if your investments take a pounding in the first few years after retirement…

    …you’ve got to ask yourself one question: ‘Do I feel lucky?’ Well, do you, punk? [apologies, dirty harry]

    Looking at bond yields right now I don’t feel lucky I feel sick

    Dying rich is the epitome of #firstworldproblems

  • 25 Playing with Fire February 5, 2020, 9:46 am

    This is both really useful and slightly depressing. For a pessimistic pension access age my ISA/GIA number is within touching distance of what I’d want to retire with no pension at all. I guess I can console myself that having a pension gives me a second bite of the cherry if it all goes to shit with the ISA so might push me to be a little bit braver with the pre-pension number? And if I need to tighten the belt it’ll be a relief to know that it’s only for a couple of years before the champagne cork of the SIPP is popped.

    I wasn’t expecting the ~optimum equity % to be so low for a 20 year period. It’s great when research challenges my gut feeling. Don’t think I’ll be shifting as low as 30% but it does highlight the benefit of selling a chunk of equities on the eve of retirement.

    Still, if the choice is between the certainty of working three more years now against the ~5% possibility of working more in the future (albeit with the challenge of explaining a decade-long gap year, during a recession) I’ll take that chance thanks.

  • 26 The Accumulator February 5, 2020, 9:59 am

    @ Jonathan & W – read these pieces about sequence of returns risk and how early adverse real returns can kybosh your plans (in other words why SWRs have to be so conservative to deal with worst case outcomes):


    This piece adds more, including how a decent set of early returns can put your portfolio on a heavenly upward trajectory:

    @ W – I broadly agree with you on rising equity glidepaths as protection against worst-case outcomes and high valuation environments as we face today. Good piece here that adds a lot of nuance: https://earlyretirementnow.com/2017/09/13/the-ultimate-guide-to-safe-withdrawal-rates-part-19-equity-glidepaths/

    @ Faustus – I agree with you on dynamic spending rules. There’s no free money though and ERN is very good at showing just how desperate things can get if you start out with an optimistic SWR and are then forced to cut spending in the face of poor returns using Guyton and Klinger:



    McClung’s book, Living Of Your Money, is excellent on dynamic spending and dynamic asset allocation.

    Historically, you probably could jack up your SWR a little and get away with it. But you could be in schtook later if events turn against you. That’s always the trade-off.

    @ Naeclue – the likelihood is that Billy could use a higher SWR given the drop in market valuations after the stock market decline. But we’ll have to wait another 39 years to know for sure 😉

  • 27 Jonathan February 5, 2020, 10:30 am

    Faustus, Naeclue, Neverland and of course TA, thanks. That is why I wondered about a predetermined mitigation strategy.

    Naeclue’s post raises the possibility of this being a floor withdrawal rate of (say) 3% with predefined conditions for withdrawing another 1% or even more. It would need a bit of playing around with a Pfau-type model to refine those percentages, and validate the conditions set. You would have to plan your retirement lifestyle round the uncertainty of when you get the windfalls that enable the cruise (or whatever) you promised yourself.

    And Neverland’s post raises another possibility. What if you kept something like 3 years withdrawals as cash in the portfolio, with a predefined rule about when you draw down the cash rather than the investments (and then when to replenish it). Again it would need testing in the models, but I rather think that the scare stories for market drops tend to be taken from the equity indexes and that a realistic retirement portfolio would be cushioned anyway so that a 3-year delay in withdrawals would mitigate the majority of the damage to the investment portion. (By “realistic” I mean the 70:30 portfolio in TA’s table, globally diversified; it was interesting how equity heavy that advice is and many might feel safer in territory somewhere between 60:40 and 40:60).

  • 28 Neverland February 5, 2020, 10:48 am


    What we are practically doing is having a higher bond allocation approaching retirement and then expanding back into equities when we actually retire

    Comes to the same thing as holding cash really

    Someone above made a good jargoneze argument why to do this, but really it just came about for us by common sense (why blow it after a ten year bull market?)

    In terms of tax the bonds sit in the pension and the equities sit outside it. For a whole bunch of reasons I’m not particularly worried about the equities getting hammered in the short term, although I think that is quite likely

  • 29 Darka February 5, 2020, 10:55 am

    Would it not make more sense to use the natural yield from your portfolio, therefore not having to sell to release capital and therefore the SWR is whatever it is?

    I realize of course this requires a greater initial investment, but it should be much safer I believe.

  • 30 Jonathan February 5, 2020, 11:00 am

    Neverland, it sounds that you have already thought through your personal risk mitigation. In fact anyone interested enough in the workings of their investments to read Monevator regularly is quite likely to have done that. In a way, the SWR discussion is a theoretical exercise to come up with a plan that you could recommend to someone else.

    Just one minor point: I am currently nervous about having too much in bonds but I don’t know whether this is justified. It seems to me that at a time of low interest rates there is a higher than usual risk attached to bonds. They may not fluctuate as much as equities but I fear the drop that will come when there is a recovery in interest rates might prove longer lasting than most stock market falls. (Not against bonds as such, just feel need no more than smooths a balanced portfolio).

  • 31 MrOptimistic February 5, 2020, 11:19 am

    Thanks for the article. Not often I laugh when reading about swrs, and for the right reasons. It’s uncomfortable thinking about the future in an uncertain world when you are seeking assurance of security, which is unattainable irrespective of your spreadsheet skills but these articles at least give a framework in which to think and order thoughts.

    I am retired and don’t have the need to try and figure out when I can knock off early (well not in the financial sense ( gulp). Btw we used to call that ‘ dropping out’: flowers, sitars and rock music being key factors.

    In terms of bonds/cash, my brain says 50:50. My heart says invest in equities.

    In terms of Monte Carlo and bootstrapping. Multi- period correlation isn’t properly addressed, hence the need to bolt on sequence of return risk as an extra factor.

    Dying rich holds no terrors for me so I think 40 % equities roughly, and swr around 2.5%.

  • 32 Neverland February 5, 2020, 12:09 pm


    Yes I hate to hold bonds but they work as a diversifier and they are liquid (unless you buy junk).

    Time was you could get a decent guaranteed inflation beating return from NS&I but that’s long gone.

    If you want to scare yourself go and have a google of the brief and ‘eventful’ life of Argentina’s 100 year bond issue. 🙂

  • 33 Al Cam February 5, 2020, 12:26 pm

    re MC, I hear you.
    IMO a good overview of the various issues with the main MC techniques/approaches is provided at:

  • 34 Xailter February 5, 2020, 12:29 pm

    Well crap – I think I need to reconsider my 3.3% SWR… bookmarking for a second read later and to get into Pfau’s research. Thanks for the informative article TA!

  • 35 The Investor February 5, 2020, 1:14 pm

    Note all — Out of respect of the work @TA has put in and the time of others reading and learning from this series, I’d suggest we not go down the rabbit hole below on this comment thread please. I’ll just address the @Darka’s query here and then we can look at it in a future article. 🙂

    Would it not make more sense to use the natural yield from your portfolio, therefore not having to sell to release capital and therefore the SWR is whatever it is?

    I realize of course this requires a greater initial investment, but it should be much safer I believe.

    Yes, this is my personal approach/preference and I may write a semi Devil’s Advocate piece at some point. 🙂

    But as noted by @TA in an earlier installment in this series, it will usually imply requiring a bigger portfolio or else accepting a smaller SWR (at least in the absence of alpha-generating edge, which is the safest bet for the vast majority.)

    Pure dividend/income focused strategies have been shown by several studies to under-perform the market, so an edge-less income investor needs to keep that in mind, too.

    Even then I’d argue that the risk of underperforming, if modest, is an acceptable price to pay for not having to make decisions / take risks from selling down capital.

    Our occasional contributor The Greybeard has written quite a bit on this:


    As said above, let’s come back to this another day (or do feel free to raise relevant questions / make points on any of @Greybeard’s posts)

  • 36 TahiPanasDua February 5, 2020, 1:48 pm

    The SWR, as mentioned, is not only for those contemplating retirement with limited means though most would presumably be in that position. Even those in good shape at retirement may want to consider a SWR to end up with little or no capital to pass on to others. “use it or lose it”. “you can’t take it with you!” “do you want to be the richest corpse in the graveyard?”
    That’s not for everyone. We are in our 70s and comfortably retired, living solely on dividends with a 2 years emergency cash fund, no mortgage, and my wife’s modest 5k per annum civil service pension. We live below our current income without consciously economising so see no need to run down capital. You probably think we are absolutely loaded. Not so. We are comfortably financed and spend an average of about 4k a month before tax. That turns out to be all we need to do, within reason, anything we like. Indeed it is more than we need so we donate about 20% to family and others. We feel, and are, totally privileged.

    “So what’s the point TahiPanas2?” I hear you say. To be reasonably content in life, it’s good to have a sensible view of what “enough” is. After arriving at an estimate of basic spending needs plus an allowance for individual luxuries such as nice holidays and restaurants or whatever, the estimate of “enough” becomes mainly philosophical rather than mathematical via SWRs. That isn’t easy as we are all under pressure from the media and society to spend, spend, spend. I appreciate that what I am describing is itself a luxury and not feasible for most people

    Some of you may recall me harping on about this before. Apologies, I can’t help it.

  • 37 The Accumulator February 5, 2020, 2:41 pm

    @ Jonathan – There’s a ton of ideas out there for dynamic withdrawal strategies which allow you to adjust your withdrawals as you go. Check out the links to the Guyton & Klinger pieces in comment 26 for just one. Or this from the Bogleheads: https://www.bogleheads.org/wiki/Variable_percentage_withdrawal

    Studies on holding a bucket of cash or bonds in reserve generally show that it’s a drag on performance and can ultimately reduce your SWR. That can happen because the extra cash prevents you from getting far enough ahead in the early years, then 10 years worth of bad returns hit and your cash is done after 3 years. For example.

    McClung is good on income reserves.

    Selling your bonds when equities are down is a better idea than selling both as is usually modelled by most SWR scenarios.

    You’re right that SWR models are just that. Models for you to adapt to your circumstances. The literature is extensive though. Somebody has already modelled the workarounds you suggest. Typically you find:

    Upgrades in SWR are modest.
    Most ideas work in some conditions but not all. Often then the question is, do I want to protect myself against the worst-case scenarios or against dying rich.
    Withdrawing more initially increases your risk of cutting back later. Many people think this is a good trade-off because there’s good evidence that most people spend less once they reach old old age.
    There are always trade-offs.
    A few things look like they work pretty well in most situations but require investors to pay attention and be relatively hands-on. Operating a sophisticated strategy may prove too much if faculties decline or an unsophisticated relative has to run the family fortune. Though there’s always a remedy like annuitisation.

  • 38 Jonathan February 5, 2020, 3:09 pm

    Thanks for your reply TA. My exploration of web resources has been admittedly random rather than systematic so those links will be interesting. Obviously if there is little to be gained from a more complex solution it isn’t worth doing.

    I appreciate there would be a pay-off between the risk benefit of having cash in a pension fund and the reduction in expected returns. My question is whether there might be a sweet spot where the trade-off is good value. Cash seems to be a recognised solution in your linked Pfau table 3 (assuming US bills approximate our building society cash).

    I confess in my case my curiosity about SWRs is theoretical rather than practical. As you will know from my previous contributions I am lucky enough to have a decent floor pension from a DB scheme so my personal interest is just in being strategic with other funds to best allow discretionary spending to continue for quite a few years.

  • 39 Al Cam February 5, 2020, 3:20 pm

    re a cash bucket “on the side” (ie over and above the SWR Pot).
    Big Ern states in Part 25 that
    “So, for the record, let me state that this cash bucket strategy seems to work pretty well, despite my previous doubts! It’s relatively inexpensive insurance against Sequence Risk!
    The key point to note is that such a bucket helps to manage/mitigate sequence risk but does not, of course guarantee, to eliminate it!

    The next logical question is how big a bucket would be appropriate for a UK-based person. A discussion on this topic can be found at:
    Mike’s original article is now behind a paywall but the discussion contains the salient points and is still accessible foc.

    All of this is of only pseudo-academic interest if you have eight years of cash or cash-like instruments anyway!

  • 40 Mezzanine February 5, 2020, 6:35 pm

    @John B

    “Surely that’s equivalent to 2 pots, one providing £10k for 25 years, and another providing £10k for 15.”

    I understand what you’re saying (think you meant £10k for 30 & £10k for 15) but if we logically split a single pot into two, it looks like we pay a risk price to avoid the logical pots from running dry. This is reflected in a reduced overall SWR and (I think) artificially increases the size of the pot required.

    For a scenario where we need £20k for the first 15 yrs followed by £15k for the next 15yrs, £429k is needed if we average out the drawdown (a), however, its a combined £468k if we logically split the drawdowns (b):

    £k Yrs SWR Pot £k
    20 15
    10 15
    (a) 15 30 3.5% 428.57

    10 15 5.5% 181.82
    10 30 3.5% 285.71
    (b) 467.53

  • 41 The Investor February 5, 2020, 6:36 pm

    As everyone thinks about the various trade-offs involved in making these decisions, it’s worth remembering what I (tongue in cheek) coined as the first law of thermodynamics and investing risk.

    It states:

    “Investing risk cannot be created or destroyed. It can only be transformed from one form of risk to another.”

    Particularly relevant here:

    Whenever a row flares up about the merits of some particular asset class, often someone is really just expressing a preference for one type of risk over another.


    For ‘asset’ class in the second quote, read ‘drawdown strategy’ here.

    – Go cash heavy and you’ve got greater upfront security at the potential cost of a smaller pot later (depending of course on sequence of returns, but it will usually be true as markets tend to go up).

    – Go natural yield and you hugely reduce the risk of running your capital down to zero, but at the potential cost of lower annual spending, lower overall returns, and leaving money on the table when you offski.

    – Use a ‘dynamic’ method and you’re probably going to curb the tails of outcomes, but you risk paying (for want of a better word) tracking error, as your (effectively) active decisions see you lose to the market, and likely increase fees.

    And so on…

    Please note NONE of this is to say don’t explore these options, and certainly don’t think I’m not loving the conversation here!

    Just remember that there’s unlikely to be an optimal ‘return/SWR solution’ — you’re really looking for an optimum ‘SWR/risk/return’ solution for you. 🙂

  • 42 The Accumulator February 5, 2020, 6:48 pm

    @ Al Cam – For sure, if you save up over and above your portfolio then it can only help. Any solution along the lines of “having more money” (including dropping your SWR to 2% or 1%, or living off the yield) is going to make you safer. Just takes more time and money and offers no absolute guarantees.

    @ Jonathan – my memory of the research I’ve read reveals that generally cash is a drag but is useful at staving off a short-term crisis in the early years. Notice the cash-heavy portfolios are relevant in the first twenty years. Cash can dampen a bad run of equities when you don’t have time to recover. But over the longer-term, equities have historically won out. If that crisis comes later, after you missed a run-up in equities then cash may well leave you worse off. Replacing some bonds with cash seems to work quite well. Here’s a decent piece on cash strategies:


    It’s impossible to square except in hindsight. We don’t know what will happen to us, only what did happen to other people.

  • 43 Naeclue February 5, 2020, 8:20 pm

    @Jonathon, “Just one minor point: I am currently nervous about having too much in bonds..”

    I have been investing in gilts for well over 25 years and in all that time I have seen comments just like this. I don’t ever recall someone saying “I am very bullish about gilts…”. From memory, expected returns on gilts have always been rubbish compared to expected inflation and expected returns on shares.

  • 44 Naeclue February 5, 2020, 8:37 pm

    Quick note on natural yield, if @TI allows it! Firstly taking the natural yield on your bonds is likely to be a very bad idea. Gilts and most other investment grade bonds are trading above par, so if you strip off and spend all the interest payments on your bond portfolio, the nominal value of your bond portfolio will trend downwards as the vast majority of bonds mature at par value. That’s just nominal value. You need to take inflation into consideration as well.

    Secondly, you are most unlikely to run out of money if you can live off the natural yield of your equity portfolio, but the chances are you will die rich. Can you live off the dividend income from your equity portfolio? Will the income rise with inflation and/or your spending needs? Are you happy to leave a large legacy?

    We are actually in a position where we could live very comfortably on the natural yield of our equities, but we choose to spend more as we don’t want to die rich.

  • 45 Al Cam February 5, 2020, 9:24 pm

    There is, I believe, a bit more useful information that can be extracted from the dimensions of the necessary cash bucket “on the side”.
    Specifically, the bucket puts limits on the amount (and timing) of the “flexibility” required to survive the scenarios hypothesised. The key points seem to be:
    a) stop drawing from equities for the duration of the bucket; and
    b) enact the necessary flexibility which can be composed from any suitable combination of reduced withdrawals (from non equities); another job; cash; and/or any other broadly legal money-making venture.
    Further details are provided in a chat between myself and Karsten (aka Big Ern) towards the end of page 1 of the comments to Ern’s original Part 25 post.

    IMO, this is actually quite a useful piece of info as it could, at least in principle, help put some numbers (albeit they are not guaranteed) to fuzzy/waffly concepts like flexibility, dynamic, variable, etc that always pop up when a particular w/d scheme seems to run into trouble.

    I whole-heartedly agree (and have said so many times before) that predicting – ahead of time – the, so-called, safe withdrawal rate is a really just a myth, but it does provide an interesting framework for examining the problem.

  • 46 Neverland February 6, 2020, 8:44 am

    I’m finding this ‘oh just I’ll just live off the natural yield’ stuff a bit amusing

    What everyone forgets after a ten year bull market is that companies take a chainsaw to their dividends in recessions and a good few them go bust

    When stocks go down 40% in a year or two period, dividend yields don’t go up by c. 65% to compensate least not as recall the last few recessions

  • 47 The Investor February 6, 2020, 9:39 am

    What everyone forgets after a ten year bull market is that companies take a chainsaw to their dividends in recessions and a good few them go bust

    No they don’t. See for example the graph here showing that total FTSE 100 dividend payments dropped by c.5-10% (I forget exactly) in the last recession:


    And this is just from a raw FTSE 100 tracker, which I certainly wouldn’t suggest should be the backbone of a dividend income strategy. Pretty much all equity income investment trusts from memory held their dividends un-cut throughout the 2007-2009 downturn.

    When stocks go down 40% in a year or two period, dividend yields don’t go up by c. 65% to compensate least not as recall the last few recessions

    It doesn’t matter. You’re living off the income. You leave the capital alone. What’s more the equity portion of capital declines 40% in a total withdrawal strategy, too. It’s *less* of a problem with a natural income yield strategy, anyway.

    Again, don’t want to derail this thread so let’s leave it there (may delete further on natural yield for that reason) but don’t want correct-sounding incorrect statements to give people the wrong idea. 🙂

  • 48 Neverland February 6, 2020, 10:18 am


    Oh yes they do

    Amused to see you quoting the Daily Mail there 🙂

    Something a bit more scientific based on USD from the FT: https://seekingalpha.com/article/4299521-dividend-reliability-during-recession

    I am quoting table 2 and looking at the dividend performance year-on-year in 2008 and 2009:

    Global Equity funds: -17% in 2009 and -6% in 2010 (so nearly 25% all told)
    Bond funds: -14% in 2009, -10% in 2010 and, ouch, -11% in 2011 (so c. a third? To be fair this is the dawn of QE though)

    Just ouch, ouch, ouch in summary

    I expect a lot of the resilience you are seeing in your link is that a big chunk of the FTSE-100 by market cap pay in USD and USD crashed hard as the recession started in the US, so more GBP dividends in translation

    So, never believe the Daily Mail

  • 49 The Investor February 6, 2020, 11:07 am

    @Neverland — My link quotes AJ Bell data, it’s not made up by the Daily Mail. Capita information says the same thing. GBP fell against USD after 2008, rather than rose as you state. Still, this will have indeed boosted the value of USD-generated earnings, and supported FTSE 100 dividends where relevant. Your article is a US article from a US perspective. The sort of natural yield strategies we’ve discussed on this site before employ UK equity income trusts, which as I say didn’t cut their payouts; you’ve ignored this. The risk is long-term underperformance versus benchmark IMHO, not ‘taking a chainsaw’ to dividends — in reality in one of the worse slumps since WW2 equity income trusts didn’t even take a razor to payouts.

    But even by your own figures, a raw 25% decline in dividend payouts (which would have bounced back just a few years later) is less than the c.50% drawdown in US and UK stock markets that a ‘selling capital’ SWR strategy would have had to endure.

    Anyway, the risk of dividend payout cuts with a natural yield strategy is not irrelevant — as I’ve said above you always swap one risk for another — and this would all be relevant and interesting to discuss on a post about natural yield. It’s not here.

    I know you don’t believe requests apply to you, so I really will delete anything else about natural yield on this thread. Cheers.

  • 50 The Investor February 6, 2020, 12:11 pm

    @Neverland — Deleted your comment. My argument isn’t inconsistent, it’s a different approach with a whole complex set of pros and cons.

    In contrast most of what you write is inconsistent because, natural troll that you are, you throw up any half-arsed stat or counter to any point that’s made that seems tangentially relevant, and repeat the process indefinitely.

  • 51 Jonathan February 6, 2020, 12:20 pm

    YA, TA many thanks, especially for the Okusanye link. His conclusion seems reasonable: replacing a portion of bonds with cash is useful for mitigating investor stupidity risk but has marginal impact on the sequence risk. The fraction of equities needs to be maintained though.

    But the small effects with his model portfolios at a 4% withdrawal rate suggest my speculation about cash allowing a higher SWR than the lower values in your article is wishful thinking.

  • 52 Naeclue February 6, 2020, 2:29 pm

    I know I am pushing my luck writing this, but perhaps @TI will forgive me for reinforcing his comment that essentially says looking for steady income from income ITs is just swapping one type of risk for another.

    Taking a look at the current Global Equity Income ITs on the AIC web site shows 6 ITs, with 5 year total return performance ranging from 46% to 108% (a huge difference over just 5 years), sector average was 64%. That compares with the return on the iShares global tracker ETF SWDA (according to LSE) of 82%. But the AIC stats have survivorship bias! If I look back 5 years, there were 4 more ITs in the sector. One (London & St Lawrence) has been wound up, converting to an OEIC in 2017 and the other 3 have conveniently moved sectors and/or undergone management or name changes which conveniently obfuscates the returns. Of the 3 ITs that still exist, all have underperformed with 5 year total returns of 56%, 43% and 9.4%. I don’t know about London & St Lawrence, but I doubt it was wound up because it had outstanding performance. I would add that all these ITs are geared and the extra risk of that gearing really should have given these companies an edge over the last 5 years of rising markets.

    In summary, the risk with going for income ITs, is the risk of going for active management, which is 1) likely long term underperformance; 2) a wide variation in returns about the average, although this can be mitigated by investing in lots of ITs.

  • 53 The Investor February 6, 2020, 2:33 pm

    @naeclue — I’ll leave that there so we have a more sensible response from ‘the other side’ but please @all can we leave this subject here on this thread. Thanks.

  • 54 The Accumulator February 6, 2020, 2:49 pm

    @ Investor – sell your bonds, not your equities in a downturn. Avoid realising the loss. At least as long as your bonds last.

    I realise that’s not what a plain vanilla SWR strategy models, but it’s one of the levers you can pull to improve outcomes. Also appreciate you know this already.

  • 55 Brod February 6, 2020, 3:51 pm

    @TA – that was a great link to Mr. Okusanya’s piece on spending down the bonds first. Thanks for sharing. It intuitively sounds good and it ties in well with ERN’s work on Escalating Glide Paths.

    I’ve got 4 years in bonds and 2 years in gold at my planned/hoped for drawdown rate, and my plan had been to let them wither on the vine so to speak. But if I spend down the bonds/gold first, I have to make it to 10 years before my small Civil Service pension will probably kick in and then another couple of years till SP age. So while I pretty damn sure I’d be OK, I don’t want to get to DB and SP, which would cover off my floor, and find my portfolio ravaged beyond recovery and not have enough to leave to my wife to ensure she’s OK.

    How to plug the bond gap? One more year I think. Or maybe 3. That also has the benefit of adding to my DB pension. I’m a part-time paragon and have 2 young children (so it’s not as if I can send 6 months in SE Asia or anything) and it’s not too stressful, but my God, where will I find the motivation to actually do stuff?

  • 56 Al Cam February 6, 2020, 4:12 pm

    Apologies if this is stating the obvious, but every extra year you work (even P/T) is one less year to fund before your (increasing) pensions kick in.

  • 57 Brod February 6, 2020, 6:19 pm

    @Al Cam – yes, I do know that of course. And stating the obvious is fine. I’m just whinging after an “interesting” conversation with my boss.

  • 58 The Accumulator February 6, 2020, 6:45 pm

    @ Brod – good luck with the boss. My plan is to spend down cash and bonds first too, though I’ll rebalance into bonds along the way if equities continue to advance. Giving a lot of thought to having 5% in gold as well – for use in an emergency, anytime in the first decade.

  • 59 Naeclue February 6, 2020, 7:35 pm

    My answer to the Angus/Billy conundrum is that both are wrong. They cannot both be right. Rationally, all else being equal, Angus and Billy should have the same drawdown rates at any instant in time. Angus cannot have more because he started drawing down when stock markets were higher. The fact is, Angus has more information than he had a year ago (the sock market drop over the last year) and he she feed this new information into his drawdown plan.

    My approach is to reset the drawdown rate each year, currently at 3%, but increasing with the drop in our left expectencies in some as yet undetermined way. This is not a great strategy though, as it means the income could change quite a lot from one year to the next as stock markets rise and fall, even on my 60/40 portfolio. I think a better way might be to base returns on rolling average stock market levels over (say) the last 5 years. So for example, the average closing price of the Vanguard LifeStragey 60 (accumulation units) over the last last 5 years was about 165 and the value at year end was 198. An average value of my portfolio over the last 5 years (after drawdown) would have been about 165/198 times its year end value. Maybe I should multiply my year end portfolio value by 165/198 and then draw 3% of that over the next year? That approach would certainly smooth out the income from one year to the next compared with taking 3% of the year end value, but it is complicated and I have no evidence to back this up as an approach or to understand what SWR based on it would be ok, how many years to average over, etc. It just seems likely to be better.

    As for rising equity glidepaths, or other strategies as in the McClung book, these tend to suffer from the same kind of irrationality as the Angus/Billy case. At any point in time, the asset allocation of the portfolio should be the same for all investors, all else being equal. So any variable asset allocation strategy that results in Angus and Billy having different asset allocations simply because Angus started drawing at a different time makes no sense.

    I fear that many of the more complicated strategies out there may be suffering from biases that appear through data mining.

  • 60 ZXSpectrum48k February 6, 2020, 8:56 pm

    @Naeclue re post #21 Billy and Angus. The “time inconsistency” or “memory” issue is an artifact of all fixed SWR approaches. Fixed SWRs violate what is termed in dynamic optimization as the Principle of Optimality (or Bellman equation). By contrast, approaches that use constant percentage withdrawal rules or valuation-based approaches (say CAPE ratios) satisfy this principle given they produce time consistent withdrawal rates. While being mathematically correct, their issue is obvious: withdrawal amounts will vary each year, possibly substantially, with portfolio values. Pragmatism vs. mathematical rigour: you decide.

    For those in the FIRE community looking to make retirement conditional on having reached a certain savings target (for example a 4% SWR or 25x living expenses) it’s also worth noting that a fixed SWR cohort analysis will tend to structurally underestimate failure rates for any specified SWR. This stems from the SWR failure rate being is simply the percentage of cohorts that fail i.e. each starting cohort is equally weighted. In contrast, if one instead targets a specified portfolio value before triggering retirement then, while the starting dates of each cohort will be equally spaced, the retirement dates will not. Retirement dates will have a higher probability density around highs in the market and lower probability density around lows in the market. This clustering effect in endogenous retirement timing results in more cohorts failing. For something like a 4% SWR, it might push up the failure rate by 2-5%; for a 3% SWR perhaps 1-2%. If you’re an optimist then the success rate has only been reduced by a few percent; if you’re a pessimist, the move from a failure rate of 2% to a failure rate of 4% is a 100% increase in failures.

    @TA: you can delete this if it’s veering too far off topic.

  • 61 Naeclue February 6, 2020, 10:38 pm

    @ZX, thanks, I am aware of Bellman’s principle of optimality, but wasn’t going to mention it as I thought I had said enough and wanted to try to get the message across clearly!

    Your second part essentially relies on the assumptions 1) that more people are likely to retire after stock market rallies that after slumps; and 2) retiring after a stock market rally implies lower longer term returns than if retiring after a slump. Both not unreasonable assumptions, especially 2 if Shiller’s research is still to believed.

    I guess someone might want to take account of CAPE-10, p/b or something when they retire and adjust their drawdown rate accordingly. I notice this kind of analysis is absent from @TA’s article, although he does cover a “low interest SWR”. So the question I have for @TA is whether taking CAPE-10 or similar into account makes much difference to the SWRs? Or has it not been looked at in the research you have investigated?

  • 62 Naeclue February 6, 2020, 11:37 pm

    Actually, I just looked again at McClung’s book and he has a whole chapter (9) on using valuations to set the initial drawdown rate, so I guess that answers my question. His conclusion is that valuations are able to predict future maximum drawdown rates, but not very reliably. Even so, he does describe a method to take valuations into account and says it is worth doing (according to his backtests).

    Still interested to hear @TA’s thoughts on this.

  • 63 Brod February 6, 2020, 11:51 pm

    @Naeclue – this (CAPE10) has been addressed by ERN in part 3 of his SWR epic:


    All his data is US and his base portfolio is 60/40 S&P500 / 10 year treasury bonds which is probably not applicable in the (dis-)UK, but I use them (and all the other US work) as useful guidelines to examine the relationships rather than “the truth”.

  • 64 Al Cam February 7, 2020, 1:08 am

    The following link may be of interest and possibly ring a few bells too

  • 65 The Accumulator February 7, 2020, 10:17 am

    @ ZX – I wouldn’t dream of deleting your comment. Not off-topic and very helpful. Also, it’s The Investor who wields the Oblivion Button 😉

    @ Naeclue – yes, multiple researchers I’ve read show that low SWRs are correlated with retiring when market valuations are high, to some degree. Therein lies at least the partial solution to your Billy / Angus problem. High market valuations are associated with low SWRs, and there may be a smidge more wiggle room after valuations drop. I think ZX summed up the situation pretty perfectly: mathematical rigour versus pragmatism. I tilt more to the pragmatic end of the spectrum, so I’m pretty comfortable with a practical approach. We’re all going to have to adapt our plans as we go, so we might as well get used to a level of ambiguity / uncertainty.

    The Bogleheads set out to fix the ‘memory problem’ with VPW – at least that’s what my own problematic memory remembers. There’s another system out there that purports to do the same, but I can’t quite remember it off the top of my head. I’ll post some more links later to valuation-based research and that other system. Am supposed to be working right now!

  • 66 Al Cam February 7, 2020, 12:07 pm
  • 67 MrOptimistic February 7, 2020, 12:21 pm

    In terms of cash buckets, the retirementcafe.com did a series of straightforward articles. Upshot is that it is suboptimal in terms of theoretical returns but gives intangible benefits in terms of psychology. If it stops panicky behaviour then it may be worth the likely drag on performance. For various reasons I think I am effectively doing that already albeit a bit extremely perhaps.

  • 68 The Weasel February 7, 2020, 1:29 pm

    Well… What an eye opener.

    Looks like I’m late to the FI party.
    I’m 40ish, I love my job, just hate the commute. Was aiming to call it quits in 10 years but never actually ran the numbers.

    Given my required FI income would be around £25K, my ISA is short by about £250K. I think even contributing £1000 per month wouldn’t allow me to bridge the gap between 50 and 60 (being pessimistic re the guvment playing with the minimum retirement age), because, according to this article most of that money has to be in cash or bonds.

    But then again my pension is already chunkier. And I’m contributing about £1.2K pm to that. Which means that by 60 I’ll have about an £800K pot. More than required by my income needs it seems.

    My conundrum is this: should I bother living like a monk for the next 10 years, to continue living like a monk the other ten years?

    Or should I enjoy my money now that I have the health – yet not much time I can call my own? Especially considering how inefficient ISA investing is…

    Food for thought.

  • 69 The Investor February 7, 2020, 1:47 pm

    @The Weasel — If you’ve very confident about your pension and the overall situation then it’s worth reading the wide-ranging comments from readers of this and other articles in the series, as other options have been tossed about.

    For example if you have a lot of equity in your home you could possibly release some of that as a bridge and then repay it with a tax-free lump sum when you can access your pension. (Not personal advice, just one idea)

  • 70 Neverland February 7, 2020, 2:43 pm


    ” if you have a lot of equity in your home you could possibly release some of that as a bridge and then repay it with a tax-free lump sum when you can access your pension”

    You really thing a bank would lend on that basis knowing someone was going to quit working or are you suggesting just not telling them?

    Recent experience of early retirees trying to get mortgages backed with substantial pension assets (e.g. Ermine) has not been positive.

    Also asking for a loan on the basis of an employment income and then quitting shortly afterwards could potentially be mortgage fraud?

  • 71 Jonathan February 7, 2020, 3:15 pm

    Weasel, while a financial website inevitably concentrates on investing technicalities, in the end the FI game (RE or not) is about gaining the lifestyle you crave. It is important not to lose sight of that. Unless you enjoy living like a monk it is only worthwhile if the payoff gives you a compensating gain in lifestyle enjoyment. Doesn’t sound as if it does for you.

    However there are few jobs where the satisfaction continues for ever. The question becomes whether it is worth a mild sacrifice (maybe living more like the abbot) in order to have the freedom to make a choice at some point – whenever living monk-like during the gap to a pension coming on stream becomes a more attractive lifestyle option than staying working. There seem to be quite a lot of people where the financial possibility of early retirement means they feel in a strong negotiating position to request part-time flexible working; that can be supplemented by savings drawdown to get their required life enjoyment with their frustration with their job now adequately diluted.

    But from all your wise comments to different blogs, of course you know that.

  • 72 Neverland February 7, 2020, 4:21 pm


    “My conundrum is this: should I bother living like a monk for the next 10 years, to continue living like a monk the other ten years?”

    The future doesn’t just tumble out of a spreadsheet, its probably what you least expect. It could involve illness for you or someone in your family, unexpected redundancy, disability or even a large unexpected financial expense

    Money (even in a pension) at least gives you some optionality to cope with the unexpected, so personally yeah, I would keep living like a monk…

    The ultimate geeky retirement modeller, Retirement Investment Today, retired recently and what he has been doing is nothing like his original plans as far as I can tell. Because he has money it doesn’t matter

  • 73 The Investor February 7, 2020, 5:06 pm

    Also asking for a loan on the basis of an employment income and then quitting shortly afterwards could potentially be mortgage fraud?

    The OP said he was looking to quit work in *ten years* not “shortly afterwards”.

  • 74 The Accumulator February 8, 2020, 8:48 pm

    @ Naeclue: +1 Al Cam’s link to ERN. Also on valuations and SWR:




    @ anyone interested in historic worst case UK SWR scenarios:


    “The historical model highlights four particular periods in UK’s 100 years market history where the SWR would have been so low as to warrant no more than 2.5% withdrawal (after 1% fee); those starting a 30-year retirement between 1900-1913, 1937-1939 (bang in the middle of the World Wars), 1947-1952 and 1969-1973.”


    BTW, if that 2.5% SWR horrifies anyone (and it does me), then reduce fees to way less than 1% and remember it’s for a 50:50 UK equities:bonds portfolio over 30 years. 60:40 would be better, as would greater diversification.

  • 75 Al Cam February 9, 2020, 1:39 am

    For a word or two of caution re the Kitces work mentioned by Abraham in the last link above, do please take a look at:

  • 76 Al Cam February 9, 2020, 1:49 am

    RIT’s take on the UK experience may also be worth a look too, see:

  • 77 The Accumulator February 9, 2020, 8:55 am

    @ Al Cam – it would be good if you could put some context around your Kitces comment. The link you’ve pasted makes it look like Kitces is being accused of being a liar – to someone who decided not to investigate any further.

    In fact ERN is picking out a post where Kitces used a nominal returns calculation to create a comparison across retiree cohorts. Kitces points out that his figures are nominal and then goes on to make the inflation-adjusted calculation a couple of paragraphs further on. ERN’s article is stretching a point when he somehow decides that ‘over-optimistic’ reader might miss all this.

    None of which has anything to do with the UK experience that I posted the link about. Sooo… please add helpful context.

  • 78 Vanguardfan February 9, 2020, 10:44 am

    Meanwhile, in the real world, most people don’t spend ages wrangling spreadsheets to determine their withdrawals to the nth decimal place. I think what we really need is more consideration of the drivers of spending behaviour and habits, together with some simple rules of thumb that can help people keep on track. Most people are fairly habitual in their spending, except when they are not – so they need some guidance about how to decide if this is the year they can afford to go on the big trip, or get the roof done, or help out with children’s house deposits/weddings/further qualifications. The point is, these spending decisions are made constantly in real time, and they are not made on a context free spreadsheet but by human beings. So, I’d hypothesise that big spending is much more likely to occur during good market runs, and less likely to occur when your portfolio hasn’t done so well. I’d really love to see some research in the micro-behaviours that support successful retirement spending/money management strategies, and practical rules of thumb that can help people work out when they are over (or under) spending.

    I think ZX’s point about relative income over a long retirement is important, but again, needs the context of how spending patterns change over the life course. As an older person you just don’t need lots of the furniture and household kit you bought as a young adult, because you already have it. With time and health, you can burn through a lot of leisure spending if you choose, but once frailty and lack of energy sets in, the spending can become really quite tiny. You’re not going to be dabbling in the latest technological advance in home cinema or buying lots of new kit for your ultra marathons.

    I know this is all very qualitative and imprecise, but sometimes the spreadsheets seem to me to be disconnected from the concrete reality of how spending decisions are made and money is managed. If disaster ensues, well, you will have to spend less. Key lesson – make sure your floor spending is as secure as you can make it.

  • 79 Al Cam February 9, 2020, 11:35 am

    Apologies, that I overlooked the possibly clickbait title ERN used. And I most certainly was not accusing anybody of being a liar.

    Abraham does refer to this piece of Kitces work in the link that you posted re the UK experience. And thus IMO it may be relevant.

    Anyway, I will try to keep an eye out for emotive titles, etc that could be misinterpreted without sufficient additional context.

  • 80 The Accumulator February 9, 2020, 6:41 pm

    @ Al Cam – Thank you! I’m probably over-sensitive about the possibility of misinterpretation but it’s partly the zeitgeist

  • 81 Al Cam February 10, 2020, 1:14 am

    Although this is US experience, it is definitely worth a look if only because it is still provided by one of the early and seemingly largely forgotten FIRE pioneers, namely John P Greaney. John retired in 1994 aged 38, and therefore has vast real world experience.
    If I recall correctly, amongst other things, John was also instrumental in the development of the FIREcalc tool.


    More info on JPG can be found at: https://forum.earlyretirementextreme.com/viewtopic.php?t=10436

  • 82 The Accumulator February 12, 2020, 9:44 pm

    Thanks for sharing Al Cam. Love the retro Web 1.0 look.

    Also fascinating to see that the aggressive S&P 500 portfolio looks genius from a 1994 perspective but scary as hell if you’re a 2000 retiree. Whereas a diversified MPT portfolio looks deeply average from ’94 but sage from 2000. Diversification as ever, looks like the answer. If you can’t be Warren Buffet.

  • 83 Enrique February 13, 2020, 1:54 pm

    Wouldn’t you risk your SIPP going down in the worst case scenario? That is, let’s say you have 10 years to bridge with your ISA and then you can use your SIPP. If you draw 8% in your ISA it should last for those 10 years in the worst case scenario. But in that case the value of your SIPP will also have gone down from its original value, so your original amount (that may cover for your expenses with a 3% SWR) wouldn’t be enough after those 10 years, right?

  • 84 The Accumulator February 13, 2020, 9:50 pm

    No, because a 3% SWR across a World portfolio has historically been enough to sustain your income, even after a wealth drop.
    Imagine everything is in a SIPP and forget the ISA. You retire once you hit your 3% SWR and take your income. The next day the stock market drops 5%. Your SWR is now above 3%. Historically you would always have recovered from that position.
    See this comment from Aleph who corrected me when I made the same mistake:

    For your fears to be realised, you’d have to be unlucky enough to be hit by a scenario that’s worse than anything suffered in history, or predicted by the Monte Carlo sims. That’s not impossible of course. Worse SWRs have been suffered by individual countries: https://retirementresearcher.com/4-rule-work-around-world

  • 85 MAX February 15, 2020, 7:29 pm

    Adopting a fixed safe withdrawal rate will inevitably lead to failure – either you run out of money or you die before you spend it all! So a variable drawdown strategy is essential unless your objective is to leave as much money to your heirs as possible in which case
    you´ll start out with a low SWR and perhaps a miserable retirement. The option of living off natural yield inevitably means you will receive a lower total income as you´re leaving the capital intact but at least you will have some very happy heirs! This is quite well explored on https://ace-your-retirement.blogspot.com/2020/01/retiring-on-dividends.html.

  • 86 Al Cam February 16, 2020, 12:20 am

    I totally agree that the JPG charts are full of insights and/or learning, albeit from a US perspective.
    Another important point – which IMO is often over-looked by a lot of the SWR studies – is that John uses funds that the “man in the [US] street” can actually buy, rather than pure indices*. Thus, some real-world aspects, such as fund costs and tracking errors, are actually built-in to JPG’s charts.
    Having said that, I do not think broker/platform costs are included in John’s data.

    * See, for example, the Q & A between Matt and ERN at

  • 87 The Accumulator February 16, 2020, 4:39 pm

    @ Max – A variable withdrawal rate strategy makes sense if you use it wisely to withdraw more if things go well, but not so much that you expose yourself to unnecessary risk of failure later – which is the tricky balancing act. It will still lead to you dying with money in the bank. As will living of natural yield – only more so. I can’t think of a weirder definition of failure, btw. I think you underestimate people. I doubt many will slavishly follow a fixed rule when they see their portfolio heading for failure, or – hopefully – exceeding their wildest dreams. Most people will naturally adjust in the face of real-life results.

  • 88 Playing with Fire February 20, 2020, 8:57 am

    On the mortgage front, I found getting a cash-out mortgage on a house owned outright painfully difficult, even while employed (and borrowing less than x2 salary). It would have been easier if I was relocating or willing to move in order to apply for a purchase mortgage. I found no providers were willing to lend to invest. I did find a provider willing to lend to for a BTL property that I hadn’t yet found but wanted funds released in advance for so that I could buy at auction. I also found a cracking broker who was willing to answer a lot of hypothetical questions.

    There was nothing in the T&Cs that concerned me regarding non-disclosure of possibly retiring early at some unspecified point in the future. There was a general question about likely imminent changes in circumstances which didn’t seem to apply.

  • 89 Rachel October 18, 2020, 1:18 pm

    Hi again Accumulator. Thanks again for your great series. I note that you mention for periods of 8 years or less pre-pension, you might simply save enough in cash plus a top up for inflation. This seems particularly relevant to our situation as we would like to retire at 50-55 and we are anticipating a pension withdrawal age of 57.
    Do you have any more specific advice for those in this situation? Are we simply looking to accumulate the cold hard cash in a an investment ISA with the expectation that it will be fully depleted when we turn 57?
    Also interested to know any thoughts/experiences of couples planning to retire at a specific age each (eg 50) but who have an age gap (in our case, 6 years).
    Happy Sunday!

  • 90 Calum February 27, 2023, 5:16 pm

    Hi, nice article.

    Have you considered the effect that a small % of gold (5-10%) can have on the SWR of an investment portfolio? I know people always say “it’s the worst returning investment ever”, but as part of a portfolio that gets rebalanced annually it can be really powerful and increase the SWR. This post on Portfolio charts makes the point well: https://portfoliocharts.com/2015/11/17/how-safe-withdrawal-rates-work/

  • 91 The Accumulator February 27, 2023, 6:38 pm

    Hi Calum,

    Thanks and yes. I’ve checked out the impact of gold using long-term GBP returns on Timeline. It didn’t make much difference one way or the other.

    Gold makes more of an impact on Portfolio Charts because the data starts circa 1971. Gold takes off around that time because the US stopped their prohibition on private investors trading it.

    It’s likely that returns from the earlier gold standard era underplay gold and Portfolio’s starting point overplays it.

    I’ve come to the conclusion that it’s probably a good idea for a decumulator to own gold in case both equities and bonds decide to do a synchronised swan-dive – right when you’re in the sequence of returns risk crosshairs.

    I agree with you on a 5-10% allocation.

    There’s a bit more on my thinking here:



    Are you recently retired or plotting your escape?

  • 92 Calum February 28, 2023, 3:16 pm

    Hi Accumulator.

    Plotting FI, more for life control than to escape from the world of work entirely. I’m a way off yet though. Very much an accumulator, yet really enjoyed the effect gold has had on my portfolio when rebalancing during 2020 and 2022.

    I’d argue that we are unlikely to go back to a world where private gold ownership is prohibited in the US again, so portfolios charts starting point is the correct one to use. What are you’re thoughts?

    Although saying that I’m paranoid enough about our own government to hold my gold in Switzerland.

  • 93 The Accumulator February 28, 2023, 11:11 pm

    Ha, yes gold was a rare bright spot last year.

    I think gold returns in the 1970s were rocket-fuelled to some extent by the unshackling of the private market. Returns were insane for a few years and I’d guess that the subsequent 20-year bear market was partially reversion to the mean.

    We could start from the 1980s, say, to try to ameliorate that effect, but those returns are informed by the ’70s.

    So I don’t think it’s possible to choose a representative era.

    I favour knowing as much about the history of an asset class as possible, so I can discount biases in the data / my own brain – positive or negative.

    On balance, as a deaccumulator, I’m interested in gold due to its low correlation with equities and bonds. But as an accumulator I’d be wary of an asset that relies purely on investors bidding up the price.

    Given it’s weird history I’m cautious about drawing too many conclusions about gold hence why I think you’re spot on choosing a modest allocation.

    Good luck with your journey to FI. You sound like you’re well on your way. I think you’re right to emphasise the life control aspect. That has proved much more important to me than never working again.

  • 94 Calum March 1, 2023, 9:30 am

    Thanks, and congratulations on reaching FI by the way =)

    My portfolio is ~80% equities, 7.5% gold and the rest split between normal bonds and inflation linked bonds. I know as an accumulator some would argue that I should just stuff it all in equities as they have the highest average returns, but I’m more interested in the returns of an annually rebalanced portfolio as a whole, instead of the returns of individual components.

    I’ve seen elsewhere on your site that you use world inflation linked bonds hedged to the £ and you also have value, momentum and quality funds or ETFs, which all sounds like a good idea. Hope you don’t mind me asking, but which provider do you use to access these funds and which funds do you use? I’m currently in Vanguard and getting fed up of the lack of value, momentum etc. was actually quite annoyed when they wrapped up their value fund a few years ago.

  • 95 The Accumulator March 1, 2023, 7:18 pm

    80% equities and 7.5% gold will be pretty volatile so I don’t think you’re undercooking it 🙂

    I think the cult of 100% equities is recency bias incarnate. I doubt there’d be many 100% equity advocates after a lost decade. It looks smart if you only started investing after the GFC but I don’t think it’s wise to anchor on the recent past. Completely agree about taking a holistic view of the portfolio (though it’s hard to do emotionally).

    Global linkers:

    I used to use:
    Royal London Short Duration Global Index-Linked Fund

    Now use:
    Lyxor Core Global Inflation-Linked 1-10Y Bond (DR) UCITS ETF – Monthly Hedged to GBP (GISG)

    The Royal London fund is somewhat shorter duration so it should be the slightly better inflation hedge.

    Multi-factor is:
    iShares Edge MSCI World Multifactor ETF

    It’s a nice blend of momentum, quality, value and size. It hasn’t been stellar though. I’d have been better off in a vanilla World fund over the course of my holding period.

    There’s a few more options here:

    Interesting about Vanguard. Everyone launches smart beta funds to great acclaim. Smart Beta gets its arse handed to it by regular ol’ beta. Investors duly shun Smart Beta.

    Doubtless it’ll have it’s day in the sun again and come roaring back with new branding.

  • 96 Calum March 2, 2023, 9:37 am

    Great, thanks for the links!

    My understanding of “edge” funds is they should eventually outperform a normal all cap global fund, but it might take a decade or two to do so, kinda, sorta, maybe…

  • 97 The Accumulator March 2, 2023, 10:50 am

    Yeah, exactly. What I can’t make my mind up about is whether the mediocre performance (relative to vanilla global tracker) is the bad decade or the consequence of a being a watered-down long-only version of a strategy that should really be a long/short strategy to be worthwhile.

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