hiriskpaul wrote:Introducing some kind of dynamic spending, cutting back during periods of poor investment returns, spending more during the good times (as in Geoff100's Vanguard link) can take a surprising amount of risk off the table.
I totally agree about dynamic spending.
I retired 2 years ago (at age of 53). In the years leading up to retirement I was investigating various withdrawal strategies. I read Mclungs 'Living Off Your Money' (from a recommendation here ), then (being an engineer) back tested various algorithms for my self and not being satisfied started trying to develop my own 'improved' withdrawal strategy (originally using 'Simba's back testing data set', then investigating more random returns with long and shorter term trends superimposed - my version of a 'Monte Carlo' style approach).
To my eyes, I concluded the possible sequence of returns are too variable for a fixed algorithm, they all had flaws in some scenarios. Also how strong is your resolve? I was convinced whatever magical strategy I embarked on now, in the light of a prolonged downturn, I would manually intervene to some degree.
The solution I saw is a 'keep it simple' dynamic approach to withdrawal where my instinct to the current economic climate modulates my withdrawal rate.
Some other important components of my approach are well established and used by many:
- cash holding of two years general spending
- move into cash big discretional spending before committing to them (e.g. extension to house, any lavish holidays, new car etc)
Longer term I hold some 'defensive' holdings other than my essentially world passive index approach. Importantly in my view it is not to smooth out volatility of my overall portfolio but to draw upon should a market downturn go on for more than my 2 years cash. I see my portfolio more like a mix of 20% Golden butterfly/permanent portfolio style for security (to nominally cover another 8 years at 2.5%), and 80% pure equities for growth. (I settled on 10% Gilts (VGOV) and 5% gold).
I still see 4% as I always have done just a good rule of thumb, a ballpark of what is enough for your retirement, and an amount to initially withdraw. I know statistically my returns will most likely exceed this, but I am also prepared to live off less than this for a few years if necessary to minimise any long term damage to my portfolio.
As has been stated there is no one solution that suits all. Just thought it worth adding my perspective into the mix as food for thought.