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How to improve your sustainable withdrawal rate

A hamster in a wheel with the caption enough of this already.

Thus far we’ve explored why the 4% rule doesn’t work in the real world, and established a more sustainable withdrawal rate (SWR) for UK / global investors. Please read those articles if you’ve not already done so, in order to get the most out of this piece.

Now for the good bit! We’re going to talk about why you can use a higher SWR if – and only if – you’re prepared to execute a withdrawal plan that’s considerably more sophisticated than the 4% rule.

To raise our SWR we’re continuing to use the layer cake concept advocated by leading retirement researchers William Bengen and Michael Kitces.

The layer cake personalises our SWR by applying a suite of plus and minus factors.

  • The last post was all about the bad stuff. We saw how it forced my SWR down to 3%.
  • Now I’m going to layer on all the positives, and test my approach using global historical data.

Without wanting to ruin the surprise, I was pretty shocked by the results you’re about to see and I think I’ll need to be more cautious than the test suggests when the rubber really hits the road.

Even Kitces is very clear about the layer cake’s limitations:

Although the ‘layer cake’ approach of safe withdrawal rates does allow for planners to adapt a safe withdrawal rate to a client’s specific circumstances, there are several important caveats to be aware of.

The first and most significant is that many of the factors discussed here were evaluated in separate research studies, and it is not necessarily clear whether they are precisely additive.

Okay, so remember my SWR is currently bottomed out at 3%.

Let’s head for the top!

Diversification sweetener

Our baseline SWR assumes we’re invested in a Developed World 50:50 equity / bond portfolio. Yet there’s plenty of evidence that a stronger equity tilt and more diversification increases your SWR, especially over longer time horizons.

The shotgun spread of long-term equity returns means that an equity-heavy portfolio can shoot the lights out sometimes. However it also falls far short of the target on unlucky occasions. Bonds can staunch the bleeding when equities haemorrhage, yet too much bondage may also cripple you over time.

Early Retirement Now (ERN) sums up the dilemma:

Stocks have a lot of short-term risks, but in the long-term stock returns are tied to economic growth and thus, in the very long-term, real returns become less risky due to that.

Bonds have relatively little short-term risk around their trend growth rate, but their trend growth path itself has a lot of risk in stark contrast to stocks.

The answer isn’t to simply load up 80-100% in equities and hang on for dear life. Rather we can aim to alter our asset allocation as we go.

Michael McClung in his brilliant retirement portfolio book, Living Off Your Money, recommends an eve-of-retirement bond allocation of 50% for a 30-year time horizon, or 45%-35% bonds for longer stretches.

The reason for starting retirement with a heavy bond load is that you’re particularly susceptible to sequence of return risk in the closing years of accumulation and the opening decade of deaccumulation. You can protect yourself during this period with high-quality government bonds.

Kitces has shown how an ill-timed stock market crash can setback your retirement plans like an asteroid strike scuppered talking dinosaurs. He also explains how the sequence of returns in the first 10 to 15 years of your retirement can seal your fate for good or bad.

It’s important to have enough bonds to deal with these threats, and to deploy your bonds effectively.

McClung in particular has developed techniques to help you do this – see the ‘dynamic asset allocation’ section below. The trick is that you allow your bond allocation to wax and wane according to market conditions.

More generally, the historical data sampled by Kitces, Bengen, McClung and others tells us that broad diversification beyond bonds works in retirement just like it does during the accumulation phase.

They cite evidence in favour of diversifying your retirement portfolio with:

Kitces offers a diversification bonus of +0.5% SWR for significant multi-asset class diversification. It seems daft not to take it.

The Accumulator’s layer cake SWR:

3% + 0.5% diversification = 3.5%

Dynamic asset allocation

The best way to protect yourself from sequence of return risk? Live off your bonds when equities are down.

Beyond that you can further improve your portfolio’s life expectancy by using a rebalancing method that increases equities exposure when they’re seemingly cheap, and only replenishes bonds when equities have seriously outperformed.

This is dynamic asset allocation. It’s a super-charged version of ‘buy low, sell high.’ You can read about McClung’s version – called ‘Prime Harvesting’ – by downloading a free sample of his book.

Techniques such as dynamic asset allocation will test your risk tolerance because in extreme market conditions you may eat all your bonds and end up 100% in equities. Steer clear if you’re cautious.

Otherwise Kitces awards 0.2% to your SWR for dynamic allocation.

The Accumulator’s layer cake SWR:

3.5% + 0.2% dynamic asset allocation = 3.7%

Flexible spending and dynamic withdrawal rates

Here is the big SWR cherry on top. If you can cut your spending during a downturn then you gain a massive advantage over a constant inflation-adjusted withdrawal plan.

Dynamic withdrawal rates mean you adjust your spending in sympathy with your portfolio’s fortunes. Like managing a forest, being able to conserve your resources when they’re under stress is obviously more sustainable than consuming an ever greater percentage when the rot sets in.

Flexibility is key. Retirement researchers have devised all kinds of rules that allow you to spend more when the market soars, but you must also spend less when there’s trouble at mill.

McClung does a masterful job of analysing various dynamic withdrawal rates in his book, while ERN has written a sobering series exploring how much you might have to cut back using one of the better known spending systems.

In practice, cutting back is what all retirees do if their money runs short. The risk is that extra spending early in retirement may force us to spend less later if the cookie doesn’t crumble our way.

That gamble may be easier to take if you believe that retirees spend less later in life. What do you reckon? The evidence is patchy and may not apply to you. I’ve read research that concludes retirees spend more if they have it, but spend less on average because most end up with less to spend.

Kitces’ flexible spending modifier:

  • +0.5% SWR for modest spending cuts in bear markets and/or plan to decrease spending in later life.
  • +1% SWR for substantial (10%+) spending cuts in bear markets and/or plan to make significant cuts in later life.

I think Mrs Accumulator and I can handle 20% spending cuts so I plan to use Michael McClung’s EM dynamic withdrawal rules. Our State Pensions should meet near 70% of our estimated outgoings later on. I’m gonna claim the full 1% bonus!

The Accumulator’s layer cake SWR:

3.7% + 1% flexibility bonus = 4.7%

My new world portfolio SWR

My personal SWR was creamed by negative factors in the last post. It finished up at just 3%.

Now it stands at 4.7% and I’m stunned.

What does it all add up to in cold hard cash?

Well, we’d like an annual retirement income of £25,000, so our retirement wealth target at 4.7% SWR is:

(1 / 4.7) x 100 x £25,000 = £531,750

In contrast our target at 3% SWR was £833,333, which was 57% higher.

Wow. Just wow.

If I use the ‘4.7% rule’ then we’re FI already!

The sniff test

The big question is does this layer cake business pass mustard?

The research shows that your SWR changes dynamically as you shift the parameters. I can test these moving goalposts using global historical data thanks to the fantastic Timeline app.

Timeline is commercial software created by retirement researcher Abraham Okusanya. It’s aimed at financial planners who want to model portfolio withdrawal plans.

Timeline is very well designed, loaded with great features, and delivers the Holy Grail of global / UK appropriate datasets. I think it’s worth paying an IFA to run your numbers through it if they have access.1

My 4.7% SWR achieved a 99% success rating on Timeline – success means historical me didn’t run out of money in 99% of scenarios.

The bottom 10% of scenarios did require me to cut spending drastically to actually avoid running out of money though. That may not be your idea of success.

On the other hand, every path above the 10th percentile was comfy, and the best case scenario near-tripled my income for years. I used all the layer cake assumptions – good and bad – to get the result but was able to leave our State Pensions in reserve.

However that doesn’t tell me that my 4.7% rule is safe or even sustainable. We live in the future, not the past. I won’t experience the historical data in retirement, though hopefully I won’t face anything worse.

The truth is that a lower SWR is safer no matter how much kung-fu you know, so I’m not actually going to adopt a 4.7% SWR.

4% it is

So after everything we’ve been through I’m going to choose 4%.

Editor: You clutz! You total time-waster! Is this your idea of a joke?

Okay look, it’s thousands of words later and I’m as aghast as anyone, but I’m not using that 4% rule.

  • I’d have to use a 3% SWR to live with naive, constant inflation-adjusted rules.
  • But 4% with all the layer cake trimmings works with McClung’s system and it comfortably performs in Timeline.

In short, I am only happy to choose 4% because it leaves me room for manoeuvre when allied with the withdrawal techniques we’ve touched on in this series.

I also have – and must have – a Plan B.

Maybe my ability to use complex techniques will ebb through my eighties and nineties? Maybe I won’t even make it that far – a big problem given Mrs Accumulator’s interest in dynamic withdrawal rates continues to hover around zero. (“But look, they’re dynamic!”)

Plan B is to switch to a simpler, safer Floor and Upside strategy when our State Pensions kick in and annuity rates tip in our favour.

Aside from that we’ll maintain an emergency fund, there’s always the house to sell or reverse mortgage, and there are side hustles to hustle if we have to.

More than anything, digging into the research has taught me that a SWR is a very personal number. Like inside leg measurement personal. And it’s probably not even a number.

Really, it’s a floating set of coordinates that give you something to aim for. Your final destination can only be known when you arrive.

Take it steady,

The Accumulator

  1. For a fixed fee of course. []
{ 65 comments… add one }
  • 1 MrOptimistic April 23, 2019, 1:03 pm

    The Editor +1 ! Think I would have fudged the result to avoid the inevitable response. I still reckon 3% 🙂

  • 2 Gentleman's Family Finances April 23, 2019, 1:36 pm

    This is a really good piece and a bit of help for those of us who are stuck around the single figures of current withdrawal rate. To get from 6% to 4% WR say is not just an extra 50% of money that is needed – it can also be viewed as cutting your spending by 33%.
    33% is easier than 50% but it’s still not easy. that’s what frugal is the way to go

    I firmly believe that Early Retirement is an act of faith and not figures. You need to believe in it otherwise £1m, £2m, £10m will not be enough – you bite the bullet not buy the bullet.

  • 3 dawn April 23, 2019, 1:53 pm

    Been glued to these 2 posts. Thank you.
    TA still missed out the fact we now have the benefit of ‘lower fund charges ‘

  • 4 Mike April 23, 2019, 2:22 pm

    Thanks for these two posts TA, very informative and been going through a similar thought process myself. As part of being “dynamic” with your asset allocation, I wondered whether you had considered trend following at all? I cannot find the paper now, but I seem to recall reading at least one study that showed that naïve trend following added something like 1% to a SWR. Or is that too “active” to be within your consideration personally?!

  • 5 Jonathan of Cambridge April 23, 2019, 2:25 pm

    It’s “to pass muster” (to be considered fit for duty), or “to cut the mustard” (to be good enough), but not “to pass mustard”, which sounds quite painful.

  • 6 Vanguardfan April 23, 2019, 3:50 pm

    Something ZX said on the last thread resonated with me – to do with the difficulties of actually defining when you start and hence what your starting % or amount is (he used more technical language but that’s the gist I got).
    This is so true. Retirement, or reaching FI, isn’t a matter of suddenly switching from 100% earned income covering your spending needs to 100% drawdown from a portfolio.
    I’ve spent the last three years winding down my earned income. This year is the first year we won’t cover what I consider our baseline spending from our earnings (excluding expenditure that is easily stopped or deferred). My portfolio fluctuates daily. What is my SWR? Do I take 3% of its value three years ago, or now? What even is that value? What if it drops by 10% tomorrow? My pragmatic approach has been to earmark 2% for luxury spends while we’ve been earning. We haven’t spent it all. This year I’m taking the dividends (!) and will see how it turns out.
    It’s all much more of a dynamic process than these very precise and theoretical calculations suggest. Absolutely, people adapt to the amount of money they have – the reverse of lifestyle inflation if you like! If my investments crashed tomorrow, I’d stop spending on non essentials, whatever the calculations say. It’s just psychology.
    That’s why I’m a big fan of nailing down the floor with annuity, state pension and/or DB. Then you can spend freely on luxuries in good times when you are fit and well, and tighten the belt if needed. I am totally convinced that spending reduces dramatically in very old age (apart from care, and the house will fund that if needed). It’s all too easy to end up sitting on a huge wedge you were afraid of spending ‘just in case’. Being a hoarder isn’t a habit that changes!

  • 7 Vanguardfan April 23, 2019, 3:59 pm

    The other thing is that of course the older you get the more you appreciate that the number of years you have to fund is finite. I’m only 7 years away from the first guaranteed income stream kicking in, and in 15 years with SP we will have guaranteed income that should comfortably meet wants as well as needs. Another reason I like floor plus upside strategies – it’s so much easier thinking about an income stream than a big lump sum.

  • 8 dearieme April 23, 2019, 4:11 pm

    “to pass mustard” sounds like Colemanballs.

  • 9 dearieme April 23, 2019, 4:44 pm

    I still think it makes far more sense to include actuarial considerations into a calculation of systematic withdrawals. That’s why on your previous post I gave a link to a paper that described, essentially, how to exploit actuarial calculations that the US government had already done.

    (i) Here’s the longer version that someone asked about:
    I hope that helps.

    For someone who knows his health is poor he might proceed, I suggest, by treating himself as x years older than he really is. Someone retiring younger than 65 would need to rough out some actuarial calculations for himself, remembering that rough calculations are likely to be far better than doing no calculations at all.

    (ii) Or he could just use the simple Kiwi rule of thumb #4:

    Or modify it as discussed on this British forum:

    (iii) Or he could follow these Americans

    (iv) Or he could follow Wade Pfau’s suggestion and introduce an actuarial element into his calculations by spreading his investments over (only) stocks and level annuities.

    (v) At the very least, he might read this tour d’horizon from British researchers.

    The thing to remember is that the 4% rule is very expensive, in that there’s a fair chance you’ll end up with a heap of surplus money when you don’t need it i.e. near the end of life.

  • 10 Pete April 23, 2019, 5:49 pm

    I’m a couple of years into running with Mc Clungs EM dynamic withdrawl system. Its produced 5.6% and 4.8% withdrawl rates for the last 2 years, much higher than I was planning on (3.5%) and thanks to a couple of short unexpected work projects I haven’t had to fully use the recommend amount yet. What I like about it is that this unused money just stays in the pot for this year and the new rate is caculated including that. 2019 will be interesting with no worked planned and a large capital withdrawl needed. I’m finding that my spending is quite lumpy so far and I expect to be exceeding the recommended rate this year.
    So I’ll be using this calculated withdrawl rate more as a guide.

  • 11 Vanguardfan April 23, 2019, 6:01 pm

    @pete yes that was another point I was going to make – that there is predictable habitual spending (which I believe should be covered by the floor), and then there is lumpy spending which is less predictable.

  • 12 The Accumulator April 23, 2019, 6:07 pm

    @ Jonathan – Heehee – that made my eyes water.

    @ Mike – I’ve read a fair bit about trend following. It has a lot of adherents. It looks like you have to be able to handle long periods – many years at times – of being wrong, before being exceedingly right. It seems great in theory but I think many would crumble during the years it doesn’t work. For me personally, it’s a step to far.

    @ Vanguardfan – the SWR says you’ll make it through X years at X withdrawal rate (using historic figures). Therefore, pick your period. If your portfolio loses 10% tomorrow, that’s OK. You’ll make it through – unless your experience exceeds the negative bounds of history. One answer to the timing conundrum is that someone starting retirement 1 year later, after their portfolio is diminished by a stock market crash, should be able to use a higher SWR than the person who retired before the crash with a larger portfolio – because market valuations at retirement change the SWR. Anyway, I agree this is not science. I don’t think the layer cake is using precise calculations btw. There’s a margin for error there which is why I’ll play things safer than ‘4.7%’. Personally, I’d rather use floor and upside but State Pension and annuities are two decades away for me. Won’t get a DB pension. Precocious FIRE types could be 30 plus years too young for floor and upside.

    @ Dearieme – Do you use the RMD system? If so, how do you manage the income volatility implied in the system? How does the system work if you want to retire before 65?

    @ Dawn – We don’t have the benefit of lower fund charges. The baseline SWR comes from historical prices that don’t include investment costs. So the higher costs that would have actually burdened investors in the past are factored out already. You won’t need to deduct much if you’re investing in cheap index funds but it’s still a cost not a bonus.

  • 13 The Accumulator April 23, 2019, 6:14 pm

    @ Pete – very interesting. I intend to use McClung myself. Lumpy spending handled through flexibility to cut non-essentials, emergency fund and probably keeping my hand in with a bit of part-time.

    If I look at our spending over the last several years, when we’ve been in work, it’s pretty lumpy. No reason for me to think that’ll change I guess.

  • 14 Vanguardfan April 23, 2019, 6:44 pm

    @TA – 20 years to your floor is still finite. It’s not eternity or even 50 years. So you’ve got a known upper bound to your needs, which is always helpful. I think we sometimes forget that we are not going to live forever 🙂
    Anyway, I can’t talk really as I’m still clinging to the safety net of some earned income, which is surprisingly hard to let go of. I do agree with GFF though, it’s an act of faith. I suspect that in a few year’s time, when I can see the income looming into view, I will be able to let go.
    If I didn’t have that DB income (I know I’m lucky, although it definitely factored into my career choice), I think I might be tempted to set up a gilt or even cash deposit ladder for to cover basics for the years before state pension/annuity age. Haven’t worked out whether that works out more expensive.
    I guess I’m just not much of a risk taker. Others will do it differently.

  • 15 Hari April 23, 2019, 6:51 pm

    @dearieme The actuarial calculations are for a population and we have a solitary life… This was brought home to me in the last few weeks, when I was informed of the recent deaths of two students, aged 60, from my cohort reading mathematics at University, there was only 8 of us and that’s 25% gone in just a few weeks, I am less inclined to speculate about my longevity for obvious reasons…

    Plus one for McClungs book and I have just started from the beginning of this tax year (initial withdrawal rate is calculated at 3.9%), although I have been in early retirement for almost 12 years with virtually all my income coming from our portfolio.

    Having been tested by starting in late 2007 by an early “sequence of returns fall” it felt natural to keep spending somewhat restricted by no extravagant holidays or expenses.

    If one has three budget figures in mind for spending, Basic no frills lifestyle, Comfortable with holidays, meals out, etc and Deluxe, lots of travelling for extended periods.

    Then that equates to withdrawal rates now of 1%, 2% and 3%, whilst 12 years ago, with a smaller portfolio it was more like 1.6%, 3.3% and 5%.

    So I would say lifestyle has moved from Comfortable to Deluxe but there would be no huge sacrifice in going back to comfortable, yet that is a substantial decline of 33% in spending.

    I think varying income with the conditions is only sensible and comes with no great downside. I very much doubt I will need to spend the full 3.9% from McClungs and I will save the surplus ! I am aware of the danger that one ends up with too much money as well as the possibility of too little. There is a lot of luck involved all round.

  • 16 MrOptimistic April 23, 2019, 7:04 pm

    I am a bit puzzled as to how the withdrawal rate can be discussed independently of asset allocation, for example the NZ thread didn’t seem to specify that assumption. Based in my own risk tolerance, backed by McClung for high CAPE scenarios, I am assuming a 40% equity load, globally diversified with a small company and value tilt, plus overweight hedged global Index linked stuff. Is that broadly consistent with the conclusions here?

  • 17 Keith April 23, 2019, 7:12 pm

    My preference is for anyone who will muster up some custard.

  • Mogul
    18 The Accumulator April 23, 2019, 8:15 pm

    @ Mr Optimistic – I’m thinking 60% global equities, multi-factor tilt (but would be happy with small cap and value), UK equities overweight (not much though), REITs, 20% global linker gov bonds (hedged), 20% conventional gilts. Questions I ask myself are: should I be 50% bonds? Should I have 5% gold? Answer on that one keeps coming back “No”. Should I go for global conventional bonds (hedged) instead of gilts? Should the UK overweight be FTSE 250 instead of All-Share? What’s the NZ thread? That last question is for you 🙂

    @ Hari – Thank you for sharing. I like your three tier framework. I got a 4% initial withdrawal from McClung so very similar. Also worth mentioning that his system contains an actuarial element too.

    Right, off for some custard. Thanks Keith.

  • 19 MrOptimistic April 23, 2019, 8:18 pm

    Cheers. Post 9 iii.

  • 20 ermine April 23, 2019, 8:25 pm

    > by using a rebalancing method that increases equities exposure when they’re seemingly cheap

    Cough. A gleam of active darkness shines through the passive armour. Market timing? Oh the joy, a rose by any other name 😉

  • 21 ZXSpectrum48k April 23, 2019, 8:41 pm

    I’m a contrarian on McClung. I see his approach as aggressive data mining. Now, I like a bit of data mining as much as the next quant, but he’s simply too focussed on running large numbers of simulations. Instead he should be replicating his empirical results across a wider variety of base timeseries to establish confidence intervals. For example, he uses just one UK dataset, which only goes back to 1923 and happens to miss out the lowest return periods. There is absolutely no point developing these results when a change of timeseries can move these numbers by +/-75bp. It’s just not rigorous.

    To be fair to McClung, other experts in this area( Pfau, Kitces, Timeline app etc) all seem to lack statistical rigour. They just assume that the total return indices they use are “correct” rather than interogating the numbers forensically. Building any total return index that far back into history involves many subjective choices.

  • 22 Far_wide April 23, 2019, 9:31 pm

    Yes, these two posts have been great. A question on the specifics – we always talk about equities/bond balance, but in practice are you actually using bonds at the moment? I’m currently using circa 2% 1-year cash fscs fixes because of the strange bond situation at the moment. Is that a “bad” thing? I have tried to research this, but the conclusion I keep ending up with is that, for now at least, if you have Gov’t protected 2% cash savings (below the £85k limits of course), then cash is just as good for UK investors. Well-reasoned disagreements very welcome!

  • 23 Vanguardfan April 23, 2019, 9:40 pm

    There are two issues I can think of that make cash and bonds different asset classes. Cash value (nominal) doesn’t change in response to market conditions the way that bonds do – that may or may not be in your favour, but it’s definitely a difference.
    Another practical consideration is that if you have no bonds in your tax sheltered accounts you won’t be able to rebalance within them.

  • 24 RiversHedge April 23, 2019, 10:29 pm

    Good post. I really like the skin-in-the-game sensibility that underlies the analysis. I see nothing unreasonable about this at all. Personally, I think asset allocation, tactical or otherwise, except at the extremes, will have a relatively muted impact on long term outcomes compared to the general “shape” of the spend path and the use, if any, of lifetime income approaches. You are right about ERN calling out the possible length and difficulty of lifestyle adjustments that may be necessary. Truth: “a lower SWR is safer no matter how much kung-fu you know” and “it’s a floating set of coordinates that give you something to aim for.”

  • 25 Getting Minted April 23, 2019, 10:31 pm

    I agree with GFF that early retirement is an act of faith by each individual. Over five years after ceasing paid work I have faith in my own approach albeit that to some it will lack statistical rigour. My portfolio is over 90% invested in equities with some high-yield bonds and commercial property and a little cash. My current investment objective is income growth and I use the natural dividend yield of my portfolio as my guide to what I can withdraw.
    I reference my own returns as an equity investor from 1985 to 2018 and based on twenty-nine five-year periods the last five years was the seventh worst one. It was a bottom-quartile sequence of returns, and yet I have faith that I am well positioned for the future. My capital may have only grown by about 6% in the five years to 31 December 2018, but my income has grown by about 43% which is well above RPI inflation and the growth in my own spending.
    I calculate that I have spent 86% of my portfolio income and co-incidentally that is 86% of what the 4% “rule” would have suggested. Going forward my portfolio yield is now above what the 4% “rule” would have suggested and I expect to spend less than 80% of that income this year. This is perhaps a risky approach but it seems to be working for me so far.

  • 26 The Borderer April 23, 2019, 11:36 pm

    It wasn’t Mustard. I’m convinced it was Professor Plum, with the candlestick in the Library.

  • 27 Lemsip April 24, 2019, 6:27 am

    Interesting post and views above. Having just switched the conventional earning stream off while still in my 40s, I am just in the process of managing drawdown and creating a framework that works for me. One of the things that became really obvious quite quickly is the dangers of false precision in SWR planning – portfolios fluctuate widely in the short term and it is hard to say when an SWR should be calculated to compare it to historical figures. In addition, there is the evident danger of data mining the past whilst having to live in the future.
    I am still an active equity investor so my current framework is as follows :
    – Enter ER with just over 2 years of expenses in cash ( bonds are not a risk worth taking in the current climate). So I have 2 pots – cash and equity investments ( equity around 94%)
    – On day 1 of ER my current lifestyle expenses are covered by 3% of overall portfolio and 4.5% of portfolio ex-SIPP so it is more or less comfortable.
    – The rule I am working towards is to move approx 3% of the equity bucket to cash at the end of each year unless the size has decreased more than 10% in which case I will replenish cash with only the dividends accrued.
    We will see how it works in practice. I do think SWR etc are good guidelines of what is relatively safe and what is insane but trying to calculate a safe figure for the uncertain future to 2 decimal figures is unlikely to be productive.

  • 28 Matthew April 24, 2019, 8:55 am

    Use 0% balance transfer cards to delay withdrawals if necessary, keep equity fund and bond fund separate so you can sell selectively at the time, and perhaps dial up the risk to avoid running out since most of the portfolio will be untouched for years

  • 29 jon April 24, 2019, 8:56 am

    @Mike, Meb Faber wrote a great paper on trend following. I believe it is his most downloaded paper. You monitor your portfolio at end of each month. Fascinating and easy to read/understand, often this stuff is written assuming you have a PhD in financial maths, here is link:

    The advantage of trend following is that it removes those tail risks of losing large amounts of money but as TA alluded there will be many years where you will underperform typical equity/bond portfolio, so you may miss out on gains but your next egg will never be decimated because you will sit in cash when a specific asset class is trending downwards. Reg, Jon

  • 30 Hari April 24, 2019, 11:14 am


    Your point on McClung data mining has validity, but what else do they have ?

    My own view from a mathematicians viewpoint is that we have;

    1) Insufficient data.

    2) The older the data becomes, it is likely it becomes stale, the mechanics of markets have changed enormously.

    3) The psychology of behaviour is probably similar, but even that is different in that there are more market participants, more data is shared, data disseminates in a speedier fashion.

    4) What happens next, may not reflect any behaviour in the past.

    Diversify and try and isolate yourself from too much group think.

    I have started following McClung ideas with my own twists !

  • 31 The Investor April 24, 2019, 1:23 pm

    Re: Data mining, back testing, the necessarily fuzzy-in-practice of most withdrawal strategies in practice — this again brings me to my once-a-thread scheduled mention of the living off the dividends strategy.

    (And as usual, I stress again it won’t be for most, you’ll need more money to start, and you’ll probably leave plenty on the table.)

    I think there’s a tendency among passive investors to think of stock markets / assets as black boxes that spit out numbers and have variables floating around them that determine the probabilities of that number spitting.

    That’s all very well, but that’s just a mental model.

    The reality is a stock market index, say, is a collection of companies. A bond index is an abstraction of a collection of legal obligations. A commercial property REIT usually owns buildings and has tenants, or at least companies that do. (I covered the latter here: https://monevator.com/commercial-property-what-can-we-expect-from-this-asset-class/)

    Over the long-term, companies in aggregate return far higher returns than cash or bonds over most periods, because otherwise nobody would own them due to the risk. They return some of that money to shareholders, as a reward for ownership, via dividends or buybacks. Bonds are usually priced to deliver a positive real return over most time periods, because otherwise nobody would lend corporates or governments money. Of course in both cases distortions from fear and greed happen all the time, and sometimes the unexpected happens (a revolution blows up a country’s currency or whatnot). But generally these are axioms.

    When you pursue a strategy of living off natural yield, you are in my view not data mining or living a back test, which personally (and not to at all criticise my awesome co-blogger and this frankly startlingly good series) I do feel to be the somewhat the case with any SWR-micro-calibration. (Not a reason not to do it. Just a call to be aware.)

    With a natural yield approach, you’re more setting up a machine that exploits the fundamentals of capitalism, because you have every reason to believe (but no certainty — see China in the 1920s, nuclear war threat etc) that the principles will hold over the long-term.

    Dividends *should* continue to rise ahead of inflation. Bonds *should* deliver a positive real return. Etc.

    Now the same is sort of true writ large of a more mathematical / passive / modeled / index-based strategy, of course. It’s driven by the same fundamentals.

    But for me “dividends should rise over time because capitalism” is a different statement to “I will withdraw 4.17% of my portfolio’s value on day one for the next 30 years* because models and backtests.”

    (*Or the more sophisticated variants.)

    Again, this is not to (or at most to constructively) criticize these approaches, which I do feel are the best starting point for many. As I say the prospect of living off natural yield is a luxury for most anyway, or at least will probably mean a more spartan retirement.

    But it is to *defend* the natural yield approach, because the modellers reliably criticize *it*. 😉

    Again, will leave that here until I can find the time/mental fortitude to delve more deeply in a follow-up drawdown/deaccumulation post of my own.

  • 32 old_eyes April 24, 2019, 1:28 pm

    Thanks for a very interesting series of articles and all the discussion around them. I am always impressed by the erudition of authors and commenters.
    I am neither surprised or concerned that you circled back to the number you first thought of. The journey is the exploration of the boundaries and confounding factors to come to a level of confidence that enables you to act, whilst recognising that in detail you are almost certainly wrong.
    As a process, it feels similar to assessing the accessible market and launch price for a new product. You start with a blank field and then start to put in constraints. Market size can’t be bigger than this because that is the total number of people with that need. It must be more than this because that estimate doesn’t include these people. This is the upper price level because that is what people are paying for the functionality today. Global trends are pushing the market aize this way and the price that way. And so on.
    You progressively cut away areas where the answer does not lie to create a zone where there is a high probability you will find it.
    The important thing is to understand the constraints and how they interact. Not to find an exact answer, because there isn’t one.

  • 33 Mike April 24, 2019, 1:36 pm

    @jon – thanks for that – I have indeed read that paper and agree it is really useful. The paper I was thinking of specifically looked at trend following in the context of retirement sequence of returns risk. The answer was effectively what you said above – because a trend following approach results in a less volatile return pattern (you may miss out on upside but you also miss out on downside) the nest egg you leave to heirs may well be lower if equity markets perform well, but you have less risk of running out of money if they don’t, hence you can increase your withdrawal rate slightly (in effect the safe withdrawal rate is based on the worst times to retire historically, where there would have been sustained bear markets which you would have exited at some point if using trend following).

    Having said all that, I am still not sure (perhaps for the reasons TA mentioned) that I will use trend following as the pressure of “losing” to the market and the temptation to twiddle may be too high! My current thoughts are similar to other posters, ie to ensure a well diversified portfolio with significant equity exposure (probably broadly equally weighted between UK, developed and emerging), but also bonds, gold, REITs and possibly commodities (but undecided about how to invest sensibly in them)

  • 34 The Accumulator April 24, 2019, 1:36 pm

    @ Old Eyes – wonderfully put

  • 35 The Accumulator April 24, 2019, 1:59 pm

    @ ZX – I think you’re being grossly unfair to McClung in accusing him of ‘aggressive data-mining’. He’s one of only two retirement researchers I know of who has even looked outside of his own country for datasets. He’s transparent about his choices and goes to great lengths to explain how you can customise his recommendations because – as we all seem to agree – claiming precision creates a false sense of security in this game. So if you want to build in more ‘safety’, he shows you how to do so. I think the researchers are making the most of the data they have available, and most warn about the shortcomings of their work – while showing which techniques can make a difference. As a quant, you speak with an authoritative voice. But I submit to you that you’d help people much more if you would point to better sources or better techniques that people can actually use. Because that’s what this is all about… trying to help people understand how they can navigate this minefield.

  • 36 UK Value Investor April 24, 2019, 2:09 pm

    @TI +1 for the natural yield approach.

    And if you’re feeling really aggressive you could withdraw the dividend and say 1% of the capital amount. But that depends on how long you think you’re going to live and how much you want to leave behind.

  • 37 Naeclue April 24, 2019, 2:21 pm

    An excellent set of articles and interesting that you eventually settled back on the 4% SWR!

    I have spent quite some time on McClung, ERN and looking at various papers, etc. but concluded that there has been too much reliance on data mining, however well meaning and careful the experts think they have been in their various analyses, I find it hard to accept that better outcomes are made more likely by following some complicated set of rules. Also, I really disliked the somewhat arbitrary amounts of withdrawal and for the more advanced approaches, the arbitrary asset allocation, which varies depending on when the drawdown started. That just seems completely wrong to me. Nevertheless, it was a useful exercise and helped us to work out a retirement income strategy

    In the end, I settled on a prudent variable withdrawal rate of 3% of the value of investments, excluding property. The actual cash amount is set once per year according to the December 31 valuation, but it is really a budget to work to, rather than a target. This is a simple approach that does not depend on what happened at some date in the past and one my wife can easily carry forward if I am not around or lose my marbles. Hopefully we will not overspend in any year, but I am not too concerned if say we spent up to 4%. Dividing the annual income we decided we wanted to live comfortably by 3% gave us a figure for our retirement income pot. The excess over this amount went into an additional spending pot, which we have been spending on house improvements and gifts to the kids so they can make use of their ISA allowances and get on the housing ladder when they choose to.

    Fortunately for us 3% is likely to be more than we need to live comfortably and indulge in our expensive hobbies, even if we do get a poor sequence of returns or some unexpectedly expensive events, but you never know what life might throw at you. If all goes well, we can hive off another pot for disposal at some point, maybe when we get our state pensions, or if/when we move to a smaller/cheaper house.

    As for asset allocation, in the end I stayed with the same annually rebalanced 60/40 global equity/bonds portfolio that we used during accumulation. The equities portfolio is mostly cap weighted, but I do have some small cap trackers and a US REITS ETF. I have been considering increasing exposure to value and from the reading I have done might increase the allocation to equities, maybe 70/30. Bonds are mostly gilts and cash, but do have some US treasuries as well for diversification.

    I did like the sound of some of the other approaches, particularly McClung’s where you only sell equities to buy bonds and not rebalance the other way, but in the end did not like the way the asset allocation might change in what seems an arbitrary way, or as previously mentioned, varies according to when drawdown started. If I wanted to vary the asset allocation, the only rational basis I could come up with would be based on CAPE valuations. I have looked at trend following as well and concluded the results were probably down to data mining.

  • 38 Jim McG April 24, 2019, 4:03 pm

    I find it really hard to estimate the spending timeline. What should I spend between 55 and 65 versus 65 to 70, and the five year increments thereafter, providing I’m lucky enough to get them? What’s a sensible taper, and how does that affect the SWR for the “early years” of retirement when you’re in full health and you might appreciate some treats better now than you ever will later? Clearly you could disappear up your own spreadsheet – as many seemingly have – trying to work this out. In the end, as is concluded, it’s a personal exercise that is linked to the key of being a good investor – knowing what makes you happy and secure in the life you lead. It’s just a bit unfortunate that answering that question is every bit as nebulous as trying to work out what a SWR might be.

  • 39 The Accumulator April 24, 2019, 6:48 pm

    @ Jim McG – This is such a personal and unknowable question. Though many researchers pull upon national (mostly US) surveys to estimate declining retirement spending through various phases of life, the fact remains that some segments don’t cut their spending (sometimes because health costs increase). Given there’s an adult care crisis building in this country, I personally don’t think it’s worth potentially stitching up your future self in exchange for a small SWR bump now.

  • 40 The Accumulator April 24, 2019, 6:56 pm

    @ Naeclue – Thank you for sharing your thinking. You seem to be in a strong position which is all to the good. I couldn’t agree more about surveying the research as the best route to clarifying your own strategy. Given how esoteric this all is, I’d be really interested to know how our system got this way. The US and UK approach puts such a burden on the individual. Fine if you can handle it, but how many can? How many know how complicated this really is? The Dutch system seems more collective but I don’t know much about it, plus I’m not Dutch. Ramble mode off.

  • 41 Whettam April 24, 2019, 8:01 pm

    Thank you, I really enjoyed this series of articles and the comments, couple of things:

    – the timeline app caps historic performance to 99% so might be worth digging into data to see whether historically you were actually safe or whether it was the cap.

    – I also really enjoyed the McClung book, however I have two problems with some of the finding (1) although in intro he places a lot of emphasis on investing in retirement is different due to withdrawals, he then pretty much ignores dividends. I know a lot of retirement researchers and others scorn yields and place the emphasis on total return, but I still intend to generate dividends (from different asset classes e.g. alternatives, REITs, as well as equities etc. in my in drawdown portfolio). I’ll probably end up adapting McClung to use dividends for withdrawals first, then similar to he suggests if additional income is needed sell from bonds and only sell equities when they are up, etc. (2) he also seems at odds with other researchers, with regards to equity vs. bond allocation, others seem to suggest a higher equity proportion for younger retirees. I think you might have a typo in this section of your post @Accumulator surely it was 55%-65% equity (not bond) allocation for longer than 30 years? But I’m hoping to retire at 55 and even 65% in equities seems low to me.

  • 42 Ben April 24, 2019, 9:16 pm

    @TA living the adjustable rate and use of simulations, as I commented on the last post. Fwiw you’ve arrived very close to wherever I got coding up my own (4% variable).

    @TI -1 for natural yield (vote?). Yields change in response to tax, regulation and fashion, and are therefore arbitrary. Much worse, giving in to three temptation not to touch the precious puts one on a slippery slope to hoarding. The psychological advantage is therefore a major detractor imo.

  • 43 Naeclue April 25, 2019, 1:10 am

    @TA, I agree the current system is not great for the majority of the general public. Most people will not have a clue how to manage drawdown efficiently. Not sure what to do about it though. I would hate to see government interference on how much I can take from my SIPP, ISA and other investments, or be forced to buy an annuity. The introduction of retail multi-asset drawdown funds which paid monthly regular income and followed best practices might work, but they would need solid rules and OCF caps to prevent fund management firms from ripping off their customers.

    @Whettam, McClung does not ignore dividends, he reinvests them. Then once per year takes cash from somewhere for consumption over the following year, according to the strategy being tested. Unless using accumulating funds this is impractical. During the year I withdraw all the dividends and bond interest from our SIPPs as it arises. Then once per year in January when I rebalance, I make an additional withdrawal from capital. (It is actually a lot more complicated than that at the moment, but that is the principal). McClung would have difficulty backtesting something like that.

    @TI also -1 for natural yield. Taking the natural yield from bonds is problematic. For example, a bond with 8% coupon will have a much higher running yield than a bond with a 2% coupon even if they have the same gross redemption yield. If your bond portfolio has running yield greater than the weighted average gross redemption yield you will likely end up unwittingly depleting capital. For equities, the world market has a dividend yield of about 2%. Taking the natural yield is therefore unlikely to provide sufficient income unless you artificially tilt the portfolio to higher dividend stocks, or churn the portfolio to buy cum-div, sell ex-div, or do something with financial derivatives, such as sell covered calls. However it is done, boosting the natural market yield means taking on the risk of underperforming the market.

  • 44 Lemsip April 25, 2019, 7:39 am

    -1 on “natural yield” as well. As an equity investor, in my experience this strategy either drives someone towards either
    – Needing to save more capital than they need if the the yields are to be derived from stable and growing high quality businesses, Businesses of this kind reinvest a significant proportion of their earnings to grow the business over the long term.
    – Starting with a lower capital base but reaching for yield and opting for so called “high yield” investments which are businesses which pay out a large proportion of their earnings each year. In the long run the lack of growth in the business shows up in fragile businesses which is not where you want to be invested in retirement.
    The UK investment climate does have an obsession with “income” it has to be said. The extreme version on some boards is the philosophy of “buying income” and “capital does not matter”.
    A classic example of the flaws of this obsession is the FTSE 100 index. It has always been a high yield candidate paying out a steady 3-4% income but over 20 years its capital value has declined significantly in real terms. So a natural yield investor using that collection of companies to derive income 20 years ago would be a significantly poorer now and so would have lost all optionality of switching investment choices or realising lump sums along the way – things that life inevitably throws your way retired or not.

    The only thing natural about the yield is that payouts are completely decisions made by managements of companies. To me the total return approach makes a lot more sense when the decisions to withdraw can be made by the investor according to their needs. In addition buybacks are ignored in the reach for natural yield and those are just as much a return of capital to shareholders.
    I suppose what your objective is. For me with a long runway ahead in ER. it is important to get growth in addition to be withdraw living expenses from the portfolio.

  • 45 The Accumulator April 25, 2019, 8:48 am

    @ Whettam – great spot on the typo. Have amended. Re: Timeline – it was the cap. Though I am happy with their reasons for the cap so didn’t award my result a 100% rating.

  • 46 xxd09 April 25, 2019, 9:44 am

    I too had read all the literature ie McClung -A little beyond my pay grade but full of interesting stuff
    Now 72 retired 16 years so may be further down the road than most here
    Squeezing an extra 0.2 or 0.3 % out of Withdrawal Rate seemed a lot of effort for disproportionate return and plus I was getting older plus many other things to do
    Extended travelling needed a “fire and forget “ Portfolio
    Settled for Global Index Funds -one for Equities and one for Bonds
    Currently 35% Equities,65% Bonds and 5%Cash
    Withdrawal Rates been around 3.5 % and sometimes higher
    Was in the desert in Arabia when 2008 struck-all over and done with by the time I came home .Portfolio back to normal by the time I got back
    That’s the sort of Portfolio I want especially as I age
    I love reading about investing and follow the twists and turns of money with the same interest I always had but I don’t meddle
    Probably the situation I should be at my age
    Love the blog and admire how there are so many different roads to Dublin

  • 47 The Investor April 25, 2019, 11:31 am

    @Lemsip — To be clear, I nowadays think very few people should be buying individual companies with the aim of living off the natural yield. I’m proposing pool vehicles, whether passive or active.

    It’d be pretty easy to assemble a bunch of income investment trusts with (off top of my head) a starting yield of 4+% and a very long-term record of rising payouts. Alternatively, I’d guesstimate a passive portfolio split say 40% UK / 40% global / 20% gilts would produce a natural yield of 3.5% to 4%, based on the running figures I have in my head as I type this. (Personally I’d be happy with the UK weighting/home bias in drawdown, due to the UK’s global nature and the reduction in currency risk).

    Dividend payouts in aggregate are far less volatile than stock markets (capital) so I think I’d be happy to be more aggressively weighted to equities as a natural yield investor.

    You propose the FTSE 100 has done poorly because of its dividend payout history; I think that is supposition to be honest. It’s a value orientated index of old economy stocks at a time where it’s paid to be a growth investor. It’s stuffed with financials that blew up in the financial crisis and are struggling afterwards. Anyway, even with these disasters the dividend payout didn’t dip much in the crisis and it’s now back at a record high.

    Also, even if the capital value of the FTSE 100 (just one market) didn’t do much in 20 years, a natural yield investor still has all their initial securities! (i.e. The ETFs or trusts or whatnot that they bought). Remember we’re comparing it to the alternative of potentially spending all your money which is what the SWR modeling method entails. So that’s a strange comparison to make I feel.

    “Losing all optionality” is a real stretch — at any time they could have sold part/all their portfolio, switched to a different approach and so forth. Again, having spent zero capital until then.

    If I was retiring very early I’d look even more favourable on a natural yield approach, personally. If you’re retiring early and using a traditional SWR method, you’re relying on models that define success in some cases as running out of money around the time you die. That’s perhaps sensible if you’re 65 when you retire and you live to 85. If you retire at 45, that’s stretching the data set and also potentially setting yourself up for a miserable old age if you have an unlucky sequence of returns between say 45-60.

    Finally, as always I make no claim this method maximizes the amount of money you’ll spend, even regardless of the fact you leave capital on the table. I’m ambivalent, and it will depend on how your cookie crumbles. 🙂 If you go down an active route (e.g. investment trusts) there’ll certainly be higher fees to pay so that’s a drag.

    The downsides of aiming to live off natural yield are very clear — you need a bigger wodge (or humbler aspirations) to get started, and you are planning to leave a huge wodge on the table when you die. (Useful if you’re in the legacy game, mind).

    These are very big disadvantages that rule it out for most people.

  • 48 The Investor April 25, 2019, 12:18 pm

    p.s. I edited my comment to change “still has all their money” to “still has all of their initial securities” since of course the value of those securities could have plunged over time. What I mean is if they bought say 10,000 shares of a global ETF as part of their initial portfolio and only spend the distributions, they still have 10,000 shares of that ETF however many years later.

  • 49 ermine April 25, 2019, 1:27 pm

    > since of course the value of those securities could have plunged over time.

    That is an interesting question, no?

    Let us take the UKX, apparently 1096.3 on the 6th April 1984 according to those nice people at Google. And about 7100 early April 2018 (2018 because the inflation calculator doesn’t do the current year). The Bank of England inflation calculator tells me that £1096 in 1984 would be worth £3460 in 2018 so he does still have all his money.

    Had they bought it all in the late 1990s or 2005-8 they’d have taken a soaking, but presumably the hypothetical live off the dividends fellow accumulated over two decades or more, so that isn’t s much of a problem. They could be charged with over-saving or excessive caution, even insufficient diversification. But they probably will still have the value of their original capital, even in something as pedestrian as a ‘value orientated index of old economy stocks’

  • 50 The Investor April 25, 2019, 2:38 pm

    @ermine — Yep, interesting. I am not going to comment further on this thread as I don’t want to derail the fine discussion here. Really do need to write my own post on living off natural yield, and then we can have a big knockabout on there. (It’s daunting because dividend data is hard to find and I’m not much of a quant anyway. Then again I may just talk high-level because that’s the whole point as I see it. I don’t see it past-data approach at all.)

  • 51 Whettam April 25, 2019, 6:52 pm

    @TA np on the typo. I think why I have enjoyed this series, McClungs book and this conversation so much, is that it reflects my journey / interest in early retirement. I was initially just really focused on the SWR and therefore what number I needed to reach to be able to retire early, however as I get nearer to my target, I have become much more interested in the practical approach to deaccumulation e.g. harvesting approach, variable spending strategies, drawdown asset allocation, etc.

    +1 @TI for your post on natural yield, I agree approach is not for everyone, but not sure why you say a “larger wodge” is required? If your numbers are right (and they look sensible to me) then its possible to use initial portfolio to buy sustainable yield with a starting yield of 3.5% – 4% so within the same range as @TA’s plan.

    As several have pointed out, one of the problems with proving that dividends have a valid role to play in drawdown is getting the data for the back testing, but it’s a shame because I think several researchers / data scientists are drawing the wrong conclusion, just because the data isn’t readily available.

    @xxdo9 that’s a 105% 😉

  • 52 xxd09 April 26, 2019, 12:18 am

    Old age coming sooner than expected!
    Should be 30% Equities

  • 53 James April 26, 2019, 1:19 am

    It can be important to understand how duration assets perform during positive and negative economic and market trends. In the papers “Improving Investment Outcomes on the 60 / 40 Portfolio” * and “A Three Asset Class Portfolio For Long Term Wealth Accumulation ” **, the use of the REIT, dividend growth, total world, and momentum stock universes are employed in the construction of portfolios that have shown higher asset trajectory growth / alpha over a 3 decade sample. Duration assets are employed during rare significant decline events. The common wisdom that duration assets must be held at all times can be a misperception of how “risk” can be experienced by an investor ( Part 2, charts 2 – 8 in ” So how does an investor use these trend indicators in investing ?” section * ). Portfolio volatility may be perceived as less of a “threat” in a market / account balance that is in a positive trend / when times are “good” ( the last 10 years for example ). Therefore,a portfolio constructed with a mix of duration assets and equity based assets may express the same volatility as a portfolio constructed with equity based assets exclusively. It is during large and emotional significant decline periods when the effects of volatilitiy may be felt, with even an investor holding a 60 / 40 portfolio feeling a “loss” aversion” bias and possibly succumbing to panic selling. Yet in a positive market trend environmnent, an investor holding a conventionally promoted 60 / 40 portfolio may be vastly shortchanging themselves of critical asset growth over time – this under the guise of “safer” or “less risk”. With the tactical piece in place, a larger “latitude” of SWR may be considered.
    . . . .
    * https://tinyurl.com/yygwgyyu
    ** https://tinyurl.com/yy4wgqb7

  • 54 MrOptimistic April 26, 2019, 7:09 am

    @Whettam. Think the larger wodge conclusion arises from an assumption that your asset selection is neutral with respect to withdrawal strategy, the dividend and coupon yield being less than the desired withdrawal rate.

  • 55 ZXSpectrum48k April 26, 2019, 7:56 am

    @TA. “You’re being grossly unfair”. Quite possible. I se value in what McClung has done. I just think at some points he can’t see the woods for the trees. He should want to quantify the sensitivity of his results to the datasets and boundary conditions. Put “error bars” around it, if you will. I think retirement researchers don’t do this because the “error bars” are of the same order of magnitude as the SWR and this might undermine the message. I disagree; it enhances the message.

    In terms of datasets, there are many available but they all cost money, some rather a lot. If nothing else, however, he could of bought a second cheap set like DMS ($4k?) to compare and extend the history for both the UK and global (ex US) returns. Taking the UK history back from the mid 20s to 1900 has quite a damaging impact on the SWRs. Many of the worst years are in that first decade.

    He also spends little time on the liability side of the equation. I think he spends just one page on inflation. Deciding the appropriate inflator is subjective but crucial in determining the SWR for early retirees. A different inflator could effectively move the WR lower by 100bp+. I see so little mention of this on FIRE blogs but the following at least raises the issue. https://medium.com/@justusjp/inflation-may-be-the-wrong-measure-for-early-retirees-8c78bd0b7283.

    As you say it’s a personal thing. I find most research too optimistic (Kitces unbearably so). Probably only ERN is toward my idea of neutral. Those “error bars” mean we can be right and wrong.

  • 56 MrOptimistic April 26, 2019, 8:30 am

    @ZX. Interesting. I returned to McClung’ s book yesterday and was reminded how ‘frilly’ it seems. All those factors, tilts and so on. I am more interested in asset allocation and associated withdrawal strategy ( what to sell, rebalancing, allocation) and find all the apparent sophistication to establish a SWR to +/-0.x % rather like whistling in the dark given the scale and range of future uncertainties and unknowns.
    I also find the natural yield approach something of a false friend giving apparent security when it does no such thing, just reduces diversity. It does however appeal psychologically in a similar way as bucket strategies.
    Since we can’t escape our own psychologies ( comfort zone) my approach is effectively a 3 bucket strategy informed, I hope, by all these other factors discussed here. I aim for an amount that matches what I need for the lifestyle, plus a bit. Opportunity losses mean nothing compared to minimising maximum loss, what it may cost in terms of lost gain is an insurance premium.

  • 57 Foxy Michael April 26, 2019, 10:27 am

    @TI Although FTSE 100 enjoys a 4% natural yield, the World is not so generous with its 2%. How do passive investors go about picking the right yield in a natural yield strategy?

    Dividends have become just another metric in the total returns toolbox. Long gone are the days where companies issued high dividends to attract shareholders. How does your SWR change when companies buyback shares instead of issuing dividends for tax reasons? What’s the tipping point?

    Psychologically, it may feel better but If you think that companies that pay dividends are a better strategy for retirement than those which don’t, then this thinking probably leaves money on the table (https://earlyretirementnow.com/2019/02/13/yield-illusion-swr-series-part-29/).

    Just to be clear, I’m not accusing dividend investing by any means. But what I’m trying to say is that dividend investing won’t give you a better SWR strategy compared to an all-equity one. You will be getting a higher income at the expense of lower price returns. I think building an income-heavy equity portfolio compared to an all-inclusive equity one falls into the mental accounting category.

    Looking forward to a natural yield article backed by numbers.

  • 58 Factor April 26, 2019, 12:11 pm

    For those incorporating an income safety “floor” in their drawdown planning, my £K income/expenditure budget for 2019/20, 16 years into retirement and based on known or past actuals, is income after tax 22 (OP after sharing on divorce 10, SP 8, ISA’d IT dividends 4) and expenditure 20 (need to spend 15, nice to spend 5), leaving “rainy day money” 2.

    N.B. The basic state pension alone = c.penury.

  • 59 Naeclue April 26, 2019, 12:26 pm

    This January was one of those rare times when I was rebalancing into equities. Since I retired it has all gone the other way. With McClung’s Prime Harvesting, he would have me never rebalance into equities and simply drawdown from bonds/cash, then replenish from equities when they grow by 20% in real terms. Just a one off case I know, but so far this year my equity portfolio is up about 10%, bonds/cash maybe 1%, so rebalancing has worked out better than not doing so, but for the previous few years I would have been better off not rebalancing out of equities.

    One thing all the recent research has shown is that the classic advice to reduce exposure to equities during drawdown has not been optimal. The question I have is, will this continue? I have been wondering whether the conclusions reached from much of the latest research may be biased by the exceptional equity returns (and sequence of returns) over the last 40 years which occurred mostly in the first 20 years. A few months ago I looked at the real returns on the MSCI World index, converted to pounds (Basically how I am invested, but excluding EM which I could not get figures for). I used inflation figures from the Barclays Equity Gilts report to convert to real returns. I found that for the 40 year period ending in December 2018, the real CAGR was 6.7%, but due to the very favourable sequence of returns, the maximum SWR, starting at the end of 1978 and ending 2018, was about 7.7%. The sustainable withdrawal rate, ending 2018 with the same inflation adjusted amount as in 1978, was 7.1%. But for the 20 year period ending 2018, the real CAGR was only 3.6% and the maximum SWR 5.1%. The sustainable withdrawal rate only 2.8% due to the poor sequence of returns from the end of the dot-com bust. A 60/40 equity/gilts fund reduced the sustainable withdrawal rate to only 2.5%.

    I think it is going to be very interesting to see how this progresses and what the research looks like in 10 years time. At the moment, it looks to me that UK 30 year MSWR’s of over 4%, however drawdown takes place, looks a little optimistic, which is why I settled on 3%. Apart form McClung’s, most research is based on US data, so maybe those investing and drawing in dollars will do better again as they have in the past, but for £ investors currently I am not optimistic.

  • 60 Naeclue April 26, 2019, 12:58 pm

    Forgot to mention, drawing down 100% equities (MSCI World) at constant, inflation adjusted 4% from the end of 1998 would have a left remaining pot size of 49% of the inflation adjusted starting value at the end of 2018, or 48% for a 60/40 fund. So both should make it through the next 10 years without running out, so maybe I am being a little too pessimistic.

  • 61 Monty Carlo April 26, 2019, 1:11 pm

    If you’re interested in rigorous financial modelling, monte carlo forecasting is a more complete look than historical backtesting.

    There is a fantastic (and free) online resource, that does both historical backtesting and monte carlo forecasting at https://www.portfoliovisualizer.com/

  • 62 The Investor April 26, 2019, 1:28 pm

    @Monty — Indeed. 🙂 We’ve covered Monte Carlo simulation before.


    They do come with their own problems though — or put better you have to be aware of the limitations.


  • 63 W Neil April 29, 2019, 7:04 am

    Most SWRs allow for an annual increase in line with inflation. Maintaining a level of income relative to the working population is another matter altogether. Salary and wages have some correlation to inflation and the working population is likely to be financing higher levels of debt and other expenses, so a greater proportion of retirees’ income should be disposable. However the gross income that can be generated from a conservative SWR will lag wages and income growth over time. Here’s a time series for the UK https://www.ons.gov.uk/economy/grossdomesticproductgdp/timeseries/kgq2/qna

  • 64 Adam June 14, 2019, 1:21 pm

    Nice article, thread. You have state pension, which I think is too pessimistic to think will be scrapped as we have lowest in the western world. You can equity release from your house, as an option. Not ideal but extra safety factor. May be inheritance in future.

    The 4% rule assumes preserve your principal instead of running it down. Also many retirees and early retirees work part time or have side income.

    I think you’re right to consider the upsides as well as risks otherwise you could end up with a taxable legacy, and/or working for longer than required.

  • 65 Mark August 5, 2020, 12:14 pm

    From the comments above, the readers are clearly an intelligent bunch of people.

    Maybe that is why everyone comes up with really complicated solutions.

    Mr Accumulator has made some excellent points here, for example, be flexible and be prepared to take a cut in your retirement income if your portfolio takes a bath.

    In a similar vein, the insistence on an inflation-linked income stream is like the captain of the ship expecting starched linen napkins at dinner while the vessel heads full steam ahead into freezing waters: it’s nice to have, but let’s address the more important things first.

    If we ditch the index-linking and withdraw a fixed percentage of our pension savings each year, sequence of returns risk is much reduced (as long as the fixed percentage is not too high). This is because, when our portfolio falls in value, so does our income. That, in turn, means that our asset allocation is not constrained by SRR considerations.

    My research (I’ll put it on the website at some stage) based on a person retiring at the beginning of 1990 invested 100% in a FT All Share Index tracker shows that if they withdraw 4% each year, their income and their fund both increase by an average 3.55% pa over 30 years.

    The obvious downside is large cuts in income (31% in 2003; 30% in 2009), but these were temporary cuts, largely reversed the following year in both cases.

    To moderate the effect of even these temporary cuts, I propose that in the years when the 4% withdrawal rate would give a lower income than the previous year, pay yourself the same as last year, SUBJECT TO an absolute cap at 6% of your fund.

    Now, our income drops by 17% and 3.5% in 2003 and 2009 respectively. Much more comfortable. Average annual income increase is 3.27% over 30 years and the fund increases by 3.20 % pa.

    Final point (well, two points) already touched on by Mr Accumulator: a 50/50 UK bond/UK equity portfolio gives a 77% chance of success. I would suggest that any plan that has a 23% chance of failure is risky, not safe; and, if you survive 30 years, well you’re on your own, bud. SWR puts you at risk of running out of money, just when you might need it most. (It also puts you at risk of having a ton of cash left over, but at least you can mitigate that eg buy an annuity when you’re older eg in your 80s).

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