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The world portfolio offers a SWR of about 3%.

Note: We’ve been having a few technical SNAFUs in the past few days, which included emailing an unfinished draft of this article at the weekend. Apologies! Heads would roll if they weren’t our heads…

The 4% rule does not work as advertised. Where does that leave folk with dreams of retiring one day? What’s a better number for UK and global investors who need a SWR that survives contact with reality?

The big benefit of the 4% rule is that it’s inspired some brilliant research. You can use this research to find your baseline SWR and calculate a reasonable retirement target figure. If you’re retired or near retirement, that baseline SWR offers you a simple formula for drawing down your nest egg at a prudent rate.

So a realistic SWR is worth having. We just need to know where to look for it.

The World portfolio SWR baseline

Wade Pfau is a leading researcher on international withdrawal rates. He used historical returns from 1900 – 2015 to calculate a SWR of:

  • 3.45% for a Developed World portfolio (50:50 world equities / world bonds)
  • 3.36% for a UK portfolio (50:50 UK equities / UK bonds)

This theoretically means that you could withdraw an inflation adjusted 3.45% from your Developed World portfolio annually – without running out of money – throughout a 30-year retirement, no matter when you retired from 1900 to 1986.

Note I say ‘theoretically’. In the real world the SWR shrinks before the headwinds we’ll discuss below.

We’ll use the Developed World portfolio SWR from here on in. It best tallies with the diversified Total World portfolio we think makes most sense for UK investors.

Failure rate bonus

It’s not often we’re rewarded for failure but our SWR goes up to 3.93% if we’re prepared to accept a 10% failure rate, according to Pfau.

Failure means our money would have run out before our 30 years was up in 10% of all historical scenarios. I think this is an acceptable failure rate because:

  • A conservative SWR strategy leaves lots of money on the table in the majority of scenarios.
  • People can avoid running out of money by cutting back their withdrawals when they see their portfolio drying up.
  • The 10% failure rate is reduced by the cheery chances of you dying before your nest egg dwindles. (Jump to our article on investor maths and scroll down to the Probability: Will you need all that money? calculation for more.)

Okay, so a 3.93% SWR it is. How much do we need to retire on then?

1 / 3.93 x 100 = 25.45 times our annual retirement income need.

For instance, if you needed £25,000 income in retirement:

25.45 x £25,000 = £636,250

Editor: You clutz! It’s the 3.93% rule then? In short, the 4% rule does work, you total time-waster?


Much like Monty Python’s Black Knight, our SWR is about to get chopped down to size.

Or maybe eaten is a more appropriate analogy…

SWR layer cake

Your personal SWR depends on ingredients such as:

  • Investment fees
  • Taxes
  • Length of retirement
  • Asset allocation
  • Sequence of returns
  • And more

These factors vary by person and help explain why the 4% rule is one size that fits no-one.

To narrow the uncertainty William Bengen (the father of the 4% rule) proposed the withdrawal plan layer cake.

The layer cake customises your SWR by adding bonuses and penalties for various factors that may influence your retirement outcome. The concept was expanded by Michael Kitces, the renowned financial planner and retirement researcher. It’s Kitces framework we’ll use to hone our baseline SWR.

Be aware that the layer cake is a confection standing on a pedestal of assumptions.

As Kitces says:

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.

Ongoing SWR research certainly implies that your specific cake mix will raise or lower the profile of individual ingredients.

For instance, Early Retirement Now (ERN) has shown that higher equity allocations have historically enabled higher SWRs over long retirement lengths.

Note: Double beware: the layer cake is baked with US data. The assumptions may not hold to the same degree using international datasets.

TL;DR – the layer cake approach is art as much as science, but it is more sophisticated than the naive 4% rule.

Let’s bake our SWR cake.

Deduct fees

Our SWR is nibbled away by investment fees. Fund fees, platform fees, advisor fees – in short any percentage slice of your returns that you don’t account for in your annual income requirement.

Happily, your portfolio’s percentage fees aren’t just chipped straight off your SWR. There’s good evidence that the loss isn’t that bad.1

Multiply your total expenses by 50% instead.

For example:

0.5% (my total fees) x 0.5 = 0.25% SWR deduction.

The Accumulator’s layer cake SWR:

3.93% – 0.25% fees = 3.68%

Retirement length

This one is a biggie. So far we’ve assumed that we’re willing to cark it within 30 years of retiring. But what if you’re not feeling so co-operative?

The quicker you clear off, the higher your SWR can be. Plan on hanging around? You incur a SWR penalty for loitering.

Blogger ERN uses US data to show that SWRs gradually decline as retirement stretches from 40 to 60 years. The SWR tends to level out at some point along the curve, especially if your SWR is conservative.

I haven’t found publicly available global historical data for retirements over 30 years, so let’s apply Kitces’ time horizon modifier:

  • +1% SWR for a 20-year time horizon.
  • +0.5% SWR for a 25-year time horizon.
  • -0.5% SWR for 40 years or more.

Intriguingly, Kitces’ modifier tallies with the results published by Morningstar in a research paper: Safe Withdrawal Rates for Retirees in the United Kingdom.

Morningstar employs a proprietary formula to estimate future SWRs for UK retirees, assuming a diversified portfolio tilted towards UK securities.

The Morningstar results suggest:

  • +1% to +1.3% SWR for retirement lengths ranging from 20 to 25 years (depending on equities allocation and failure rate)
  • -0.4% to -0.6% SWR for retirement lengths ranging from 35 to 40 years (depending on equities allocation and failure rate of 10%)

I’d like a long and happy retirement, please: I’ll take the -0.5% hit on 40 years plus.

The Accumulator’s layer cake SWR:

SWR 3.68% – 0.5% retirement length = 3.18%

Taxes. Uh-oh

You can’t avoid death and taxes they say (though watch me try!) and both must loom large in our SWR calculations.

The baseline SWR does predict your death. But not your tax rate because that’s a lot of work.

The simplest thing to do is to estimate the annual, gross, pre-tax income you will need.

For example, say you need £25,000 to live on. You believe it will all come from taxable sources, such as your SIPP and State Pension, but remember that everyone has a personal tax-free income allowance:

£25,000 – £12,500 tax-free personal allowance = £12,500 (the portion taxed at 20%)

£12,500 / 0.8 = £15,625 (the gross income you need to meet your after-tax income target)

£12,500 + £15,625 = £28,125 (the total gross income you need to live on £25,000 a year)

£28,125 / 3.18% SWR = £884,433 (target wealth required to retire and pay your taxes)

If instead you intended to draw down £12,500 of your £25,000 from ISAs then you wouldn’t have any more tax to pay on this sum.

That would make your target…

£12,500 / 3.18% = £393,081

…in your ISAs and the same again in your SIPP.

Think tax rates will be different in the far future? You’re right. Feel free to input whatever tax schedule you prophesise.

The Accumulator’s layer cake SWR:

3.18% (with taxes accounted for by gross income estimate)

Leave a legacy

Want to leave something for the kids? Then you’ll need to lower your SWR. The baseline case assumes you’re prepared to spend your last penny.

With that said, Kitces has also shown the baseline normally produces a large legacy in most 30-year historical scenarios. You only check out with less than your starting capital in 10% of cases (again, US data).

If you want to improve your chances of leaving 100% of your nominal capital then Bengen and Kitces suggest cutting your SWR by 0.2%. Increase the penalty for more glorious legacies.

I don’t have kids, so…

The Accumulator’s layer cake SWR:

3.18% – 0% legacy = 3.18%

Market valuations

Since the global financial crisis of 2008/9, bond yields have collapsed and equity prices soared. Many commentators suggest we now live in a low growth world with weaker expected returns relative to historical norms.

Wade Pfau warns that lower bond yields diminish the chances of the 4% rule working for US portfolios with 50% bond allocations.

Worse still, ERN has shown that high US equity valuations bring down the SWR over long time horizons. Toppy valuations increase your chance of running into an adverse sequence of returns – the risk that near and early retirees are especially vulnerable to.

The good news is the rest of the world does not look as expensive as the US today by the light of the CAPE ratio – a widely used measure of stock market value.

  • The US CAPE ratio is over 30 versus its historical average of 16 – pricey!
  • World CAPE is 23 versus an average of 20. A little high but not too rich.
  • UK CAPE is 16 – right around average.

That suggests high equity valuations are less worrisome to globally diversified investors than to home-biased American investors hoping their stellar run continues.

The World SWR already incorporates losses far beyond the worst suffered in the US. The World dataset includes the hyperinflation and physical destruction of two World Wars that laid waste to the Japanese, German, Italian, Austrian and French markets among others.

This should all (hopefully) mean the World SWR can cope with a wider range of nightmare scenarios than a US SWR buoyed by the bounty of the American Century.

Kitces’ valuation recommendation is:

  • +0.5% SWR for an average valuation environment
  • +1 SWR for a low valuation environment

Kitces also says:

Consider reducing the safe withdrawal rate in extreme combinations of high valuation and low interest rate environments.

Certainly Developed World bond yields are low. But equity markets don’t seem overcooked on aggregate. I’m going to play it cautiously and round down my SWR to 3% due to the low interest bond situation.

The Accumulator’s layer cake SWR:

3.18% – 0.18% valuations = 3%

At last! My world portfolio SWR

I’ve battered my personal SWR with every negative factor going and ended up with an SWR of 3%.

My desired income in retirement is £25,000, so my retirement target at 3% SWR is:

1 / 3 x 100 = 33.3333 x £25,000 = £833,333

But the story doesn’t end there! We can add another set of tiers to our layer cake to make our SWR rise again. Like blowtorching an edible Paul Hollywood on Bake Off, these moves require upgrading your skills, so we’ll get into that in next week’s post.

If you want to keep things simple and just apply your SWR at a constant inflation-adjusted rate to produce a predictable retirement income, then the steps above can put you on a sounder footing than naively following the 4% rule.

The important thing is to be conservative with your assumptions, understand how SWRs work and have a back-up plan.

Take it steady,

The Accumulator

  1. From the link: “The explanation for this is that, under the SWR framework, income withdrawal is adjusted for inflation, which means the income goes up over time and as the account balance is depleted over time, the impact of %-based fee is reduced.” []
Weekend reading logo

What caught my eye this week.

Ten million UK workers will increase their pension contributions from today, which should mean a more prosperous retirement for them down the line.

No, Monevator didn’t just benefit from a promotion from Oprah Winfrey or Richard & Judy that delivered us few million extra readers overnight.

In fact many of those millions who are about to spend less and save more are probably only vaguely aware of the fact. That’s the genius of the pension auto-enrollment scheme – started in 2012, and the true reason for the imminent extra saving.

Auto-enrollment makes it easier to do the right thing by doing nothing. So far the opt-out rate is a mere 9%. Still, I think it’s fair to say the higher contribution rates are needed – and they need to stick – to deliver these workers the retirement income they’ll expect.

This could yet be a challenge. The new contribution rates may look measly to some super-savers around here. But they will take a meaningful chunk of change out of pay packets, as this graphic from the BBC illustrates:

Higher personal tax allowances – also starting today – will ease the pain. Head over to the BBC for the full story.

Pensions and property

Even the invariably spiky Merryn Somerset-Webb in the FT hails the success of auto-enrollment, and describes UK pensions as in “fabulous shape”.

The UK pension system is well-funded by international standards, and auto-enrollment means our level of pension assets is increasing faster than elsewhere.

There’s just one potential snag, Merryn warns, which is that some wonks believe pension savings should be accessible to young people in need of a house deposit.

No no no!

A pension is a backstop. It comes with tax relief for the very specific reason that it is designed to stop you being reliant on the state in your retirement.

Once the money is in it is in, you can’t lose it gambling or in bankruptcy; you can’t create negative equity with it; and you can’t fritter it way on the internet (not until you are 55, anyway).

Enabling pension access to pump up the housing market might seem a good way to address housing inequality, Merryn scoffs, but it would destroy the integrity of the pensions system.

I agree. Lifetime ISAs are mutant hybrid enough!

[continue reading…]


The Slow and Steady passive portfolio update: Q1 2019

The portfolio is up 7.65% year-to-date

Heresy! Prepare the stake and firelighters, for I am about to commit passive investing heresy most foul. I am going to invest part of our Slow & Steady portfolio into an active fund.

I can see the mob forming now. Loathing hangs in the air like smoke, torches spark, lips snarl, my mother turns her back.

But allow me to… explain.

We need inflation protection. When inflation runs amok, the only reliable guard is inflation-linked bonds. Yes, equities outpace inflation over the long term but they’re likely to be mauled when price rises get out of control. Witness the -74% smashing of UK equities from 1972 to 1975.

As for gold and commodities more broadly – neither are dependable allies.

No, it has to be inflation-linked bonds and I believe there’s an active fund that addresses the needs of the Slow & Steady portfolio better than any rival index tracker.

The answers to three questions explain my thinking:

  • When is it okay to choose an active fund?
  • What is it about this fund that makes it the chosen one?
  • What’s wrong with the competing index trackers?

Let’s go through these questions, and then you can burn me as a heretic and scare the children with my blackened bones.

My championing of passive investing and index trackers is not ideological. It’s pure pragmatism based on the overwhelming evidence that low-cost investments and strategic asset allocation win better results for investors (as a group) than high cost investments and market-timing techniques.

I’ll choose an active fund when:

  • It’s cheap.
  • Its purpose is aligned with my strategic asset allocation objectives.
  • It’s not a black box. In other words, its workings are reasonably well communicated, and the manager’s freedom of action is so constrained that I don’t have to worry they’ll be piling into palladium futures next week.
  • It serves my needs better than any equivalent index trackers.

I believe my chosen fund meets these tests.

What’s the active fund?

It’s the Royal London Short Duration Global Index-Linked Fund – hedged to the pound.

This fund mostly trades in the high-quality, low volatility, inflation-linked government bonds needed to protect the Slow and Steady portfolio from high and unexpected inflation.

It’s cheap at 0.25% OCF – the same price you’d expect to pay for a global government bond index tracker that’s hedged to the pound. It’s not as cheap as the Vanguard UK inflation-linked gilt fund it’s replacing in our model portfolio. But that fund and others like it have a major problem.

The problem with UK inflation-linked gilt funds of all stripes is that they harbour real interest rate risk. They’re like prime beef cows carrying a nasty brain disease you’d rather not take a chance on.

In summary:

  • UK inflation-linked gilt funds are dominated by long bonds.
  • Long bonds are likely to suffer most if real interest rates rise.
  • Real interest rates have been bouncing along the historical bottom since the Global Financial Crisis.
  • If rates rebound then the long bond vulnerability of inflation-linked gilt funds could drown out their anti-inflation benefit – and stiff you with significant losses.

The fix is a fund that invests in shorter duration inflation-linked bonds. This way you get inflation-protection with lower real interest rate risk. A short duration fund will still take a hit if interest rates rise, but it’s less sensitive because it quickly replaces low yielding bonds as they mature with higher yielding versions.

The only shortish inflation-linked UK gilt funds I can find come with eye-watering price tags because they must be bought through approved financial advisors.

In contrast the Royal London fund is reasonably priced, widely available, and its global inflation-linked bonds can stand in for gilts due to their high quality and returns that are hedged back to the pound.

The Royal London holdings have a short average duration of 5. This means the fund stands to lose 5% of its value in the face of a 1% interest rate rise – which compares well with a 21% loss for the Vanguard inflation-linked fund in the face of the same rate rise1.

The fund holds a diversified portfolio of bonds with credit ratings that are mostly as high or higher than UK equivalents.

Global inflation-linked bonds won’t precisely match UK inflation rates but the evidence suggests they’re reassuringly close and owning them adds a diversification benefit to boot. And more than 20% of the fund’s holdings are in UK bonds.

The Royal London fund has existed for over three years and stuck to its mission of investing mainly in global inflation-linked and UK bonds.

It can invest in conventional bonds, corporate bonds, and in fixed income instruments with a lower credit rating than enjoyed by the UK government. But Royal London publishes plenty of information so I can keep an eye on things and sell if the managers head off the map.

I’m comfortable that the fund fulfils the Slow & Steady’s anti-inflation asset allocation requirements now and in the probable future.

I’m not interested in the fund’s recent performance. This move is about building fit-for-purpose inflation-proofing into the portfolio; short-term results are irrelevant. I expect this allocation to hand us a slightly negative return in the years ahead, given how low bond yields are and the market’s low inflation expectations.

So I’ll keep our inflation-linked bond asset allocation at 5% for now, but build it up quite quickly to 50% (of the total fixed income allocation) as our time horizon ticks down.

With plenty of recovery time still on our portfolio clock, I think we’re currently better served by mostly holding conventional government bonds with greater powers to counterbalance equity losses during a recession.

Must you do this?

There is an index tracker alternative: the Legal & General Global Inflation Linked Bond Index Fund.

I could happily invest in this fund, too. The trade-offs are:

  • It’s an index tracker so there’s no need to worry about mission creep.
  • It’s less diversified because it’s ex-UK – so no UK bonds at all.
  • It’s a touch more expensive at 0.27% OCF.
  • Its duration of 8 carries slightly more interest rate risk. However, that duration still fits with our model portfolio’s remaining 12-year time horizon.

There isn’t a huge amount in it. If you’re uncomfortable with going over to the active side, and have a time horizon greater than eight years, then the L&G fund is worth researching. (Shout out to Monevator reader Mr Optimistic for reminding me of both these global linker funds in the comments to the last episode of the Slow & Steady portfolio).

Incidentally, the real interest rate risk embedded in the Vanguard inflation-linked fund hasn’t materialised in the four years we’ve held it. And it has performed creditably for us: 8.93% annualised return, which ranks fourth out of seven funds.

But the results aren’t the point. What matters is we can’t rely on it to play its part in our portfolio and we have better alternatives.

Using an active fund like this does not change our passive investing stance in my view. We’re not market-timing, we’re not choosing the fund because we think it’s hot. We haven’t abandoned our investment principles. We are simply using the best fund available to meet our long-term asset allocation needs and to protect ourselves from foreseeable risk.

Hot! Hot! Hot!

I don’t know if I’ve done enough to extinguish the purifying flames. Hopefully the wood bundles are being taken away and I’m welcome back to the fold as a black sheep rather than roast lamb.

Either way, the Slow & Steady Portfolio has had a smoking quarter. It’s recovered much of the ground lost between October and December, with our annualised return now clocking in at a healthy 9.15%. Check it out in EyeBurn Neuro-vision:


The Slow and Steady portfolio is Monevator’s model passive investing portfolio. It was set up at the start of 2011 with £3,000. An extra £955 is invested every quarter into a diversified set of index funds, tilted towards equities. You can read the origin story and catch up on all the previous passive portfolio posts.

New transactions

So as mentioned ever so briefly above, we’re selling off our Vanguard UK Inflation-Linked Gilt Index Fund. We’ll replace it with the Royal London Short Duration Global Index-Linked Fund.

Every quarter we also contribute £955 in new cash that’s split between our seven funds according to our predetermined asset allocation. The Royal London fund therefore picks up the share of new cash allocated to inflation-linked bonds: £47.75 or 5%.

We rebalance using Larry Swedroe’s 5/25 rule but that hasn’t been activated this quarter, therefore our trades play out like this:

UK equity

Vanguard FTSE UK All-Share Index Trust – OCF 0.08%

Fund identifier: GB00B3X7QG63

New purchase: £47.75

Buy 0.236 units @ £202.44

Target allocation: 5%

Developed world ex-UK equities

Vanguard FTSE Developed World ex-UK Equity Index Fund – OCF 0.15%

Fund identifier: GB00B59G4Q73

New purchase: £353.35

Buy 1.007 units @ £350.93

Target allocation: 37%

Global small cap equities

Vanguard Global Small-Cap Index Fund – OCF 0.38%

Fund identifier: IE00B3X1NT05

New purchase: £57.30

Buy 0.2 units @ £285.94

Target allocation: 6%

Emerging market equities

iShares Emerging Markets Equity Index Fund D – OCF 0.26%

Fund identifier: GB00B84DY642

New purchase: £95.50

Buy 59.95 units @ £1.59

Target allocation: 10%

Global property

iShares Global Property Securities Equity Index Fund D – OCF 0.22%

Fund identifier: GB00B5BFJG71

New purchase: £57.30

Buy 25.963 units @ £2.21

Target allocation: 6%

UK gilts

Vanguard UK Government Bond Index – OCF 0.15%

Fund identifier: IE00B1S75374

New purchase: £296.05

Buy 1.744 units @ £169.72

Target allocation: 31%

UK index-linked gilts [Previous allocation, getting sold]

Vanguard UK Inflation-Linked Gilt Index Fund – OCF 0.15%

Fund identifier: GB00B45Q9038

Sell all: £2185.46

Sell 10.964 units @ £199.34

Target allocation: 5%

Global index-linked bonds [Previous allocation, getting bought]

Royal London Short Duration Global Index-Linked Fund – OCF 0.25%

Fund identifier: GB00BD050F05

New purchase: £2233.21

Buy 2157.691 units @ £1.04

Target allocation: 5%

New investment = £955

Trading cost = £0

Platform fee = 0.25% per annum.

This model portfolio is notionally held with Cavendish Online. Take a look at our online broker table for other good platform options. Look at flat fee brokers if your ISA portfolio is worth substantially more than £25,000. The Slow & Steady portfolio is now worth £45,000 but the fee saving isn’t quite juicy enough for us to push the button on the move yet.

Average portfolio OCF = 0.18%

If all this seems too much like hard work then you can buy a diversified portfolio using an all-in-one fund such as Vanguard’s LifeStrategy series.

Take it steady,

The Accumulator

  1. In principle, all things being equal, and all manner of extra caveats that could fill the internet. []

Weekend reading: Choose time

Weekend reading: Choose time post image

What caught my eye this week.

The idea of trading money for time underpins early retirement, although it’s not often put that way.

We can debate safe withdrawal rates, passive portfolios, and whether investment trusts have a role to play in creating a retirement income.

But the day you leave work and never intend to go back – however you got to that point – there’s no argument. You’re by definition turning down the chance to make more money.

You are swapping money for time.

There are excellent reasons to quit work ASAP. Nobody lolling on their death bed ever wished they’d spent a few more years at the office and all that.

Personally, I see downsides, too, especially to very early retirement. As a result I expect to keep doing some work indefinitely.

But you don’t have to go totally cold turkey to swap money for time.

More flexible working – especially from home – can kill your commute and give you the freedom to work around you, instead of an employer. Or you can try to work fewer hours at a conventional job.

Either way the pay-off is a double whammy, because they don’t tax free time.

In contrast early retirement back loads all the extra time into one initially distant but eventually never-ending block. It’s a slog to get there, but in theory a coast thereafter.

For some, it’s nirvana. For others it can lead to boredom, ill-health, social isolation, and a life more ordinary if it cuts down your options.

For the latter reasons, for me financial freedom is the better part of FIRE.1 But wherever your own heart takes you, think about the value of time.

As Harvard Business School professor and happiness researcher Ashley Whillans noted this month:

Over and over, I find that prioritizing time over money increases happiness.

Despite this, most people continue striving to make more money.

For example, in one survey, only 48% of respondents reported that they would rather have more time than more money.

Even the majority of people who were most pressed for time – parents with full-time jobs and young children at home – shared this preference for money over time. […]

Research shows that once people make more than enough to meet their basic needs, additional money does not reliably promote greater happiness.

Yet over and over, our choices do not reflect this reality.

True, plenty of people strive to survive. Work isn’t optional for them.

But many regular Monevator readers do have choices – or at least they can create them.

Not everything that’s valuable shows up in a net worth spreadsheet. Far from it!

Time to choose.

[continue reading…]

  1. Financial Independence Retire Early. []