This is part two of a series about the safe withdrawal rate (SWR) for a portfolio in drawdown, and how to improve it.

Unfortunately I set the cause back a bit in the first part, when I showed that the UK safe withdrawal rate is quite dismal – just 3.1% for 30-year spans, versus the commonly cited and far cheerier 4% rule that’s derived from US data.

On the other hand, it’s possible to argue that all safe withdrawal rate strategies are excessively doom laden.

SWRs are founded on the historical worst-case. Normally things turn out brighter than that. Moreover 155 years of data for the 60/40 portfolio shows that the UK SWR was 4% or more some 88% of the time.

So mostly you didn’t fail if you followed the man with the moustache.

Anachronistic heuristics

The problem is your SWR is only knowable in retrospect.

Well, your heirs can know it. You’ll be past caring.

But for my part I’d like to find out if there’s a way to track retirement portfolio wellbeing in real-time.

Can we get advance notice if it’s on the path to the sunlit SWR uplands? Or if it’s plunging into the valley of death, despair, and cat food?

Just how soon can we tell whether withdrawing 4% – or whatever number – is draining our portfolio like it’s Dracula’s supper, versus doing no more damage than a flea who fancies a light snack?

Spot the dog

The way I’m going to tackle this initially is by asking what bad looks like.

Do the historical worst-cases have specific features in common? If so, this could point the way to spending more freely when your retirement dashboard isn’t ablaze with warning lights.

By the same token, if we can pinpoint the difference between a downward spiral versus everyday turbulence that doesn’t stall the engine, then we won’t have to spend all our time clutching worry-beads and praying to the investing gods.

It’d also be nice to avoid the trappings of dynamic withdrawal rates and other complications designed to preserve portfolios, if only because many people seem reluctant to use them.

Perhaps we can instead find simpler rules-of-thumb that operate on more of a pay-as-you-go basis.

Investing returns sidebar – All returns are real annualised total returns. In other words, they show the average annual return (accounting for gains and losses), are inflation-adjusted, and include the impact of dividends and interest.

The SWR haves and have nots

The chart below divides the UK’s notional SWR retirees into two camps: those that benefitted from a 4% withdrawal rate and higher, and those that, as I believe Keynes put it, “Had a ‘mare.”

Author’s own calculations. Data from JST Macrohistory1, FTSE Russell, A Millennium of Macroeconomic Data for the UK and ONS. March 2025

Team Unlucky’s SWRs fell below the 4% line. These include every retirement cohort from 1896 to 1916, bedevilled as they were by World War One and its economic aftershocks.

Then there’s the 1934 to 1940 crowd. I’m not sure what they had to complain about? World War Two wasn’t ideal, I s’pose.

But there’s more to it than that, as shown by the 1946 to ‘47 group who were sucked under too. Indeed, the UK’s most flaccid SWRs can’t simply be written off with pat reference to a couple of world wars.

1917 retirees, for example, enjoyed a bouncy 4.8% SWR – despite their golden years stretching through two global conflagrations, a pandemic, and a Great Depression.

Most surprisingly, the class of 1932 lived high on the 6.2% hog, despite the onrush of the Second World War.

Near misses

Two later cohorts skated close to disaster but didn’t quite fall through the ice.

The 1969-ers were on track for the worst result ever until they were bailed out by the wonder years of the 1980s. (1969 was also the low point for US portfolios priced in GBP, as we saw in the last article.)

1960 retirees also nearly came a cropper. They ran a similar gauntlet of stagflation, plus huge crashes in the UK stock and bond markets.

Aside from that, most of the other cohorts sit comfortably above 4% – albeit the Y2K-ers are having a nail-biter thanks to retiring on the eve of the Dotcom Crash, swiftly followed by the Global Financial Crisis, post-Covid inflation, and Lord knows what’s to come with Agent Orange at the controls.

So with that lot swept into the bucket of the SWR damned, what can they tell us about the different roads to perdition?

A bad start

Famously, sequence of returns risk is a major hazard for retirees. That is, a string of bad returns early in retirement is far more consequential than if you took the same hit in later years, with your clogs fit to pop.

Researcher Michael Kitces established that the first decade of equity real returns had the biggest impact on US safe withdrawal rates for 30-year retirements.

Kitces found that a couple of down years at the beginning of retirement actually had a fairly low correlation with SWRs – down in the vicinity of 0.28.

The average 10-year real return for equities was much more predictive: producing a 0.8 correlation with the 60/40 portfolio’s safe withdrawal rate.

The correlation then dropped to 0.45 for 30-year annualised real returns. That’s because the final years of retirement exert less influence on the overall outcome.

The upshot is you don’t have to sweat a few years of bad returns when you’re fresh out of the gate – especially if markets bounce back quite quickly, as they did after the GFC.

Across-the-pond life

However, what’s true for the US often doesn’t hold for the UK. So I performed the same test on Blighty’s data set and discovered that our danger zone is the first 15 years.

The table below shows us the correlation between real annualised returns over various time periods and 30-year UK safe withdrawal rates for 60/40 portfolios:

	Equities	–Bonds–	60/40 portfolio
1 year	0.38	0.4	0.43
5 years	0.65	0.62	0.7
10 years	0.79	0.78	0.85
15 years	0.84	0.85	0.92
20 years	0.78	0.82	0.88
30 years	0.63	0.7	0.73

The UK’s track record tallies with Kitces finding that the first few years don’t tell us much about the path we’re on.

However we’ll probably have a very good idea after 15 years. A 0.92 correlation indicates that our portfolio returns during the first half of a 30-year retirement are likely to have a decisive impact upon the overall amount of spending the portfolio can support.

The first decade is highly informative, too.

And while the correlation of SWRs with the UK’s 30-year annualised return is much less by comparison, it remains high enough that the hindmost years clearly count for something.

Later on we’ll see that extreme events in the latter half of certain retirements can still deflect their course, for better or worse.

To sum up the above: A couple of bad years at the beginning of a retirement aren’t worth fretting about (unless they’re apocalyptic). However, ten to 15 years of poor returns are likely to lock you into the low SWR dungeon. If that happens then your portfolio probably won’t last unless you rein in spending.

What do we mean by poor 15-year returns?

Exactly what kind of lacklustre 15-year return is associated with which bleak SWR?

This scatter plot graph enables us to pick out the patterns:

The WOAT2 SWRs (red lozenge, ranging from 2.85 to 3%) are associated with 15-year annualised returns of 0% to -6%. So if you average more than 0% per year (inflation-adjusted) in the first half of your retirement, then you’re probably not going to scrape the depths in the endgame.

Next, let’s look at the same chart again, but refocus our red lozenge to take in almost the entire negative return cluster:

This view suggests that if your initial 15-year returns are negative then you can pretty much rule out a 4% SWR. Indeed, you could be heading into horrible history territory.

There is one exception. The green arrow points to the 4.15% SWR achieved by the class of 1960. They got that despite chalking up grim -3.2% 15-year real returns.

Stick around and I’ll show you under the bonnet of that journey in the next post in the series. (Consider that a warning!)

Suffice to say, I wouldn’t bank on that miracle happening again if I was clocking -3% 15-year returns.

Alright, let’s take a final goosey at the scatter plot. This time the red lozenge of fate falls upon what you could have won with weak positive returns.

Scraping a 1-2% real return puts you in a wide band where the SWR outcome is likely to lie somewhere between 3% and north of 5%.

Lastly, bagging the 4% long-term average return for a 60/40 portfolio (green lozenge of destiny) is associated with a 4.5 to 5.5% SWR.

Incidentally, the 15-year annualised return for Year 2000 60/40 retirees was 3.2%. The trendline suggests that – if they’d been doing this analysis in 2015 – they could have hoped for a 5% SWR while fearing the worst downside result of just over 4%. By my reckoning, this cohort is on course for a 4.5% SWR, assuming they average a 0% return over their remaining five years to 2030.

The story so far…

Our scatter plot provides some guidance as to the historical dispersion of outcomes.

Although it must come with the usual tug of the forelock to uncertainty.

History does not span all there is to know. For example, all bets are off if World War Three rips humanity a new one tomorrow.

SWR Cluedo

Let’s now chug on our thinking pipe and line up our main suspects in the mysterious case of the battered SWR.

Whodunnit? Was it inflation? In the grocery store? With the shocking price of bacon?

Here’s the movements of 15-year average inflation and SWRs during the periods in question:

We have our culprit, officer!

Clearly the worst SWRs go hand-in-hand with high average inflation (orange line). While falling inflation corresponds to the SWR heights.

Not so fast! It’s curious that peak inflation is not associated with the most calamitous SWRs. And some cohorts scored amazing SWRs while inflation was doing its worst. For example, 1977 delivered a 9.8% SWR despite tussling with 7.5% average inflation for the first 15-years of its cycle.

High inflation is a trouble-maker then, but it doesn’t act alone.

Let’s layer on 15-year annualised real returns in blue:

This chart gives us a better picture. Especially when you train your eyes on the blue plunges below the grey 0% returns line.

The slump associated with World War One3 is by far the deepest.

World War Two is relatively mild by comparison. Hence only seven cohorts slipped below the 4% SWR line (1934-1940) whereas fully 21 did under the malign influence of the First World War (cohorts 1896-1916).

Still, we can also see that the 1946 to 1947 brigade fell below par despite positive returns. Whereas 1960 kept its nose above water while coping with a sharp below-zero dive.

A tale of two retirements 

Those latter results help show that the second half of the portfolio’s lifespan does matter.

Both the late Forties crew and the Sixties swingers were in trouble by the end of the first 15 years – with the 1960-types looking slightly more precarious. But then the 1960 cohort enjoyed a double-digit romp to the finish line. Essentially, they were bailed out by 13% miracle-gro returns for the last 15 years. (Still, even then they only managed a 4.2% SWR.)

In contrast the fate of the Forties mob was sealed by mediocre returns in the 1960s (2.6% annualised). The crash of 1973-74 finished them off but they were already on life support.

What do I take from that? That the 1960 journey is the exception that proves the rule. They needed a Hail Mary to sustain a passable SWR and they got it.

But if your portfolio was looking similarly anaemic after 15 years, it’d be more rational to assume the 1946-47 outcome and cut back your spending accordingly. (Or to think about annuitising the bulk of your portfolio, or to take out a reverse mortgage, depending on your options.)

Looking for a sign

Behind-the-scenes of this post, I’ve spent some time delving into the individual paths taken by the UK’s many retirement runs.

I’ve found it tremendously helpful to look beyond the standard worst-case SWR scenario in search of common signs of distress that anyone could monitor to avoid spending down their portfolio too quickly.

And I think I’ve found some useful pointers! I’ll share those in the next post.

Take it steady,

The Accumulator

Bonus material: Why use the UK’s safe withdrawal rate history?

It’s important to recognise that neither the UK, nor the US, nor the World is locked onto any particular safe withdrawal rate path.

As I alluded to earlier, if we nuke ourselves to Kingdom Come then the global SWR goes to zero.

That’s that. Do not pass the Great Filter. Do not collect $40,000.

But let’s be positive. Let’s assume we don’t face a future being bent into paper clips by our AI overlords. Then we’re left with a range of possibilities which the past can help us scope.

The problem with the US safe withdrawal rate is that it looks fortuitous. It’s based on a timeline in which America won the 20th Century.

The World portfolio fails to match the US SWR, as does every other country except Denmark. (See Wade Pfau’s paper: Does International Diversification Improve Safe Withdrawal Rates?)

Huh? Tiny Denmark? Conquered by Nazi Germany Denmark? Yep, and South Africa was Top Five, beating out many more powerful and economically successful countries.

Explain that. 

More significantly, Pfau found that no country – not even the US – could replicate William Bengen’s original 4% SWR finding.

Why? Because Bengen, the author of the 4% rule, relied upon a dataset containing better US historical returns than the one used by Pfau. Both archives are well credentialed. Both offer a version of the past. But the differences between the numbers reveal there’s nothing inevitable about the 4% rule – even if you invest solely in the US.

Should US assets exhibit a moderately worse sequence of returns in the years ahead than they did in the past, then future American investors may have to anchor on a 3% rule – or something nastier still.

That’s a plausible outcome. Hence retirement researchers have turned to international datasets and Monte Carlo studies to challenge the assumptions embedded in the US’s exceptional past returns. (I’ve previously used one such database to determine a World SWR of 3.5%.)

What’s interesting about the UK’s SWR history4 is that it enables us to envisage a future which is a little worse than the American past. One of geopolitical decline. One where they confront military catastrophe but avoid utter disaster. One in which inflation is stickier than the US has previously experienced.

It’s not hard to imagine.

The UK safe withdrawal rate is an antidote to excessive optimism. It helps us avoid clinging to the singular path taken by the US, as if inferior outcomes are not possible.

Aiming for a 3% SWR, say, gives you greater downside protection – or it can be the prompt for serious research into how to improve your withdrawal rate from that baseline. 

1. Òscar Jordà, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, and Alan M. Taylor. 2019. The Rate of Return on Everything, 1870–2015. Quarterly Journal of Economics, 134(3), 1225-1298. [↩]
2. Worst Of All-Time! [↩]
3. The blue line shows you the average returns for the 15-years beyond each data point on the chart. [↩]
4. The UK was ranked 8th out of 20 countries in Pfau’s paper. [↩]

What caught my eye this week.

Going on the comments I’ve heard and read this week, many stock market types have flopped into the Easter Weekend like a late-night drunk who only makes it as far as the living room sofa.

Relief! Sweet relief.

Of course, UK investors may have a four-day break from seeing their portfolios cosplay a fruit machine – US investors just three – but Trumpomania no more respects public holidays than it does anything else.

Today’s plot lines include Trump scapegoating US Federal Reserve chairman Jerome Powell and going after the New York attorney general, more fights over wartime-law deportations, the administration threatening to walk away from Ukraine again, and a new front opened up against Harvard.

Please do read my (quarantined) political links every week if you’re still complacent and want to learn more.

Diversified distractions

Markets are certainly not complacent – at least not about the economic engine of Trump’s project – as the whipsaw volatility and wholesale dumping of US assets in recent weeks has proved.

But there’s been a silver lining for those of us with vaguely diversified portfolios.

Which is that for the first time in a long time, we don’t feel like chumps for owning anything other than US stocks – or even just the Magnificent Seven tech giants.

It’s been a long time coming. But in a typically top-drawer post this week, Nick Maggiulli described such diversification as ‘the price of peace’, even while acknowledging that:

…when you have the best portfolio possible for a given time period […], you should still expect to lose money about once every four years (on average).

That might seem crazy but it’s true.

But underperformance and occasionally losing money are just the tip of the iceberg.

The real mental challenge of holding a diversified portfolio is watching some of your asset classes underperform almost every year.

Meanwhile Adam Grossman at Humble Dollar noted that though not everyone has celebrated diversification, well, not everyone has the investing chops of Warren Buffett and Charlie Munger.

For the rest of us:

What does it mean to build a sufficiently diversified portfolio?

For starters, it should be diversified along more than one dimension. Nearly every investor, in my view, should own a combination of stocks and bonds. In addition, holding cash can help carry a portfolio through years like 2022, when both stocks and bonds were down.

Next, look to diversify within bonds and within stocks.

Be sure to check out too this great post from Portfolio Charts on what has worked best before in the biggest drawdowns.

We don’t study such data to divine the perfect asset mix to survive a bear market. That’s an impossible goal.

No, the purpose of looking back is to understand why we need to try in order to best face the future.

Strategy versus tactics

The other major part of getting through a bear market is continuing to hold. Or perhaps to buy more.

This has always taken fortitude. But in recent years it’s also taken quick reflexes.

Okay, I guess 2022’s downturn dragged on a bit unless you owned a lot of US technology stocks.

But the Covid crash was over in a few weeks. And we’ve already bounced back a bit from the initial Trump tariff tantrum, though who knows for how long:

Note again too the benefits of diversification – for the UK, so far tis but a flesh wound.

Whether you should be holding, buying opportunistically, or even trimming risk if you’ve really got the wobbles will depend on your age, risk tolerance, and portfolio mix, as well as your overall financial goals.

In other words, it’s personal. That’s why you need a personal plan, not predictions or platitudes.

But here’s some more of this week’s buy-the-dip reading to get you thinking:

• Why buy stocks before a recession? – Downtown Josh Brown
• The fear and volatility we saw in early April portends higher returns – Charlie Bilello
• Buy the dip or buy the bottomless pit? – Arcadian
• How to actually buy the dip – The Joint Account
• Is it finally time to buy British? – This Is Money

Have a great weekend all!

[continue reading…]

It’s long seemed to me, as a female of the species, that the world of finance tends to be male territory. From Crypto Bros to Wall Street Wolves, the face of finance remains distinctly masculine.

Of course I’m not suggesting that women aren’t in finance and economics – because we are.

But from much of the publicity we get, you’d be forgiven for thinking we’re still around to make the tea. 

Cherchez la femme

Hence when I came across the so-called Hemline Index, I was startled.

Here were women! Predicting broad economic trends!

But not all of us, as it turned out. Just our legs:

Source: via Fashionblogga

The economy of skirts

The Hemline Index, supposedly floated by economist George Taylor in the 1920s – although the poor guy was apparently misquoted – points to a link between stock market trends and the length of hemlines:

• When the market was climbing in the early 1920s and 1940s and again in the 1960s, skirts got shorter.
• When the market was about to crash, hemlines dropped.

Now anyone with the slightest knowledge of fashion history could point out gaping holes in this theory. But I don’t suppose the (mostly male) economists ever bothered to ask a Vogue editor. 

Different social circles, I guess.

Anyway this deeply silly idea has continued to float around since the 1920s, as a way of forecasting economic change. But recently a Dutch economist (also male) carried out a proper study to test it.

And, shockingly, it turns out that hemlines can’t predict an economic downturn. They might move following one – several years later – but that’s about it. 

So don’t go selling your shares because you’ve noticed a few girls wearing maxi skirts.

You couldn’t make it up

Pondering the perturbations of hemlines and the stock market led me to the Lipstick Index.

This is an even more peculiar theory.

Promoted by (male) American cosmetics billionaire Leonard Lauder – the 126th richest person in the world – the Lipstick Index has it that lipstick purchases are inversely correlated to the health of the economy.

Lauder argued that when times are hard (and I always appreciate a billionaire’s insight into these things), women buy lipstick instead of more expensive items like clothes and bags.

Hence you can predict an economic downturn by soaring lipstick sales.

Only you can’t, of course.

It’s not a completely stupid idea. It’s just not a predictive index.

Fickle index fashion

Leonard’s theory was originally put forward by economist and sociologist Juliet Schor as ‘the lipstick effect’. This described the consumer behaviour of treating oneself to small but conspicuous indulgences when times are hard. 

The behavioural trend is valid, but it only applies to lipstick when lipstick is in fashion.

And fashion is, notoriously, fickle.

During the 2010s, for example, people started talking about a Nail Polish Index. And when we were all at home or wearing masks during covid, it became the Mascara Index.

People buy small luxuries to make themselves feel better. And if they’re struggling, women sometimes buy make-up in order to keep-up appearances.

That’s it. Good luck trying to predict the stock market using mascara.

Hair today…

By this point though I had fallen down the rabbit hole of girly economic indicators.

I needed another hit! What else could economists invent to turn women into financial weather vanes?

Well, in 2023 we apparently all became recession brunettes:

Not to woman-splain, but things have gotten expensive and many people are looking for a lower maintenance and more economical approach to blonde hair — but without moving away from blonde completely.

[…] the balayage, bronde and scandi trends aren’t going anywhere, instead they’re often being adapted to fulfil customers’ wants and needs. It seems many are “opting for a cost-friendly approach which allows them to still be a blonde, but reduces the frequency of salon visits each year.”

(So often untouched by fashion’s fluctuations, I missed out on this one too, being a lazy long-term brunette already.)

What’s the theory? That the rocketing cost of going to the hairdresser to top-up your blonde combined with the squeeze on disposable income to encourage lower maintenance hair trends.

In other words, women have let their natural hair colour regain ground as they’ve skipped the salon. Or they’ve died their hair ‘bronde’ (a mixture of brown and blonde) because it costs less to maintain. It’s a transatlantic fashion – although looking south the Australian style magazines seem pretty horrified.

Thankfully recession brunettes aren’t (yet) being used to predict the future. It’s more seen as a reflection of the rising cost of living – driving what the Wall Street Journal called a ‘Great Unblonding’.

Blondes may have more fun but it seems brown is cheaper to run.

Index vs index

The Great Unblonding rather contradicts the Haircut Index, developed by Japanese researchers.

According to these guys, when women wear their hair long it’s a sign of a healthy economy.

The wonks theorise that maybe when the ladies are doing well, they have less time to think about getting a haircut. So avoiding the hairdressers is a sign of financial success rather than a sign of recession.

There are enough holes in this theory that I could drive a bus through.

Only it’s awfully difficult to drive a bus in my high heels…

Ain’t no high heel high enough

The High Heel Index was developed by Trevor Davis at IBM, to match heel height to economic upturns.

Davis suggested a higher heel indicates an economic boom. Although he also found that at the start of a downturn heel heights initially went up, before going down after a few months if the economy didn’t rally.

So not an entirely obvious link, then.

I wonder if anyone’s ever combined these into a Financial Crash Superindicator?

Really bad news, surely, would be heralded by a brunette with red lipstick wearing a long skirt and very high heels.

Jessica Rabbit as the Fifth Horseman of the Apocalypse, perhaps?

Bare market

Finally, of course, there’s the Stripper Index.

Proponents of this will tell you that when the strippers start reporting a drop in club attendance combined with a sudden downturn in how much they’re tipped, financial disaster is on the horizon.

I’m not entirely sure of the robustness of this method of data collection, since it’s almost entirely anecdotal. But the economists seem to enjoy talking to the strippers about it.

(Don’t even get me started on the research into how Playboy’s Playmate of the Year tends to be ‘older, heavier, taller and less curvy’ in hard economic times. I’m not going near that one.)

The strippers on my social media feeds are saying that a crash is imminent (again). We’ll see how accurate they are.

But the big question is: does the underwear agree?

Getting to the bottom of it

You see, after I discovered index after index that painted women as mindless consumer-bots, I was thrilled to find one that turned the tables on men.

The theory behind the Men’s Underwear Index is that when men start feeling the pinch (no pun intended), they cut spending first on those things that people mostly never see.

No, not that secret folder of naughty pictures on their laptop labelled ‘Misc Receipts’.

Rather, their underwear. 

According to this theory, an early indicator of impending economic crisis is a sudden drop in men’s underwear sales.

So while women repeatedly come across as vapid overspending beauty-obsessed trend followers, men are cast as cheapskates who don’t replace their underwear.

That’s equal opportunities for you.

Fashion index fatigue

A lot of these indices seem to fall into the ‘correlation does not equal causation’ trap.

They’re also pretty pointless. As The Investor said years ago, you need a plan, not predictions.

Then again, it’s nice that the economists have something to do on a Friday afternoon when they’re bored of actual work.

And what do I know, anyway? My little female head is too busy with thoughts about skirts and shoes to handle Important Ideas. 

Excuse me while I rush off to buy a lipstick to make me feel better about being poor.